<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10/A-3
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
COHESION TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3274368
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2500 FABER PLACE, PALO ALTO, CALIFORNIA 94303
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code (650) 354-4300
Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
None
- -------------------------------------------- --------------------------------------------
- -------------------------------------------- --------------------------------------------
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(Title of Class)
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<PAGE> 2
COHESION TECHNOLOGIES, INC.
INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION
- -------- ------- --------
<S> <C> <C>
Item 1. Business SUMMARY; RISK FACTORS; SELECTED HISTORICAL AND UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL DATA; RELATIONSHIP
BETWEEN THE COMPANY AND COLLAGEN AFTER THE DISTRIBU-
TION; MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS; BUSINESS; FINANCIAL
STATEMENTS
Item 2. Financial Information SUMMARY; RISK FACTORS; SELECTED HISTORICAL AND UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL DATA; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS; FINANCIAL STATEMENTS
Item 3. Properties RELATIONSHIP BETWEEN THE COMPANY AND COLLAGEN AFTER THE
DISTRIBUTION; BUSINESS
Item 4. Security Ownership of Cer- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
tain Beneficial Owners and MANAGEMENT
Management
Item 5. Directors and Executive MANAGEMENT
Officers
Item 6. Executive Compensation MANAGEMENT
Item 7. Certain Relationships and SUMMARY; RISK FACTORS; RELATIONSHIP BETWEEN THE COMPANY
Related Transactions AND COLLAGEN AFTER THE DISTRIBUTION; THE DISTRIBUTION;
MANAGEMENT; CERTAIN TRANSACTIONS
Item 8. Legal Proceedings BUSINESS
Item 9. Market Price of and Divi- RISK FACTORS; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
dends on the Registrant's OWNERS AND MANAGEMENT; DESCRIPTION OF CAPITAL STOCK
Common Equity and Re-
lated Stockholder Matters
Item 10. Recent Sales of Unregis- DESCRIPTION OF CAPITAL STOCK
tered Securities
Item 11. Description of DESCRIPTION OF CAPITAL STOCK
Registrant's Securities to
be Registered
Item 12. Indemnification of LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Directors and Officers
Item 13. Financial Statements and SUMMARY; SELECTED HISTORICAL AND UNAUDITED PRO FORMA
Supplementary Data CONSOLIDATED FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERA-
TIONS; FINANCIAL STATEMENTS
Item 14. Changes in and Disagree- NOT APPLICABLE
ments with Accountants on
Accounting and Financial
Disclosure
Item 15. Financial Statements and FINANCIAL STATEMENTS; EXHIBITS
Exhibits
</TABLE>
<PAGE> 3
PRELIMINARY INFORMATION STATEMENT
COHESION TECHNOLOGIES, INC.
LOGO
COMMON STOCK
PAR VALUE $0.001 PER SHARE
This Preliminary Information Statement ("Information Statement") is being
furnished in connection with the distribution (the "Distribution") by Collagen
Corporation ("Collagen"), to the holders of record (the "Collagen Holders") of
Collagen's common stock, par value, $0.01 per share (the "Collagen Common
Stock") at the close of business on , 1998 (the "Record
Date"), of one share of the common stock, par value $0.001 per share (the
"Common Stock"), of Cohesion Technologies, Inc. (the "Company") for every one
share of Collagen Common Stock held by the Collagen Holders on the Record Date.
As of June 25, 1998, there were 8,861,034 shares of Collagen Common Stock
outstanding. The Distribution will result in the distribution of 100% of the
outstanding shares of the Company to the Collagen Holders on a prorata basis. It
is currently anticipated that the Distribution will be effective on
(the "Distribution Date"), and the Common Stock will be distributed to Collagen
Holders on or about that same date.
No consideration will be paid by the Collagen Holders for the distributed
Common Stock, and there is currently no public trading market for such stock. It
is expected that a "when-issued" trading market will develop on or about the
Distribution Date; however, the Company can make no assurance to that effect.
The Company has applied to have the Common Stock quoted on the Nasdaq National
Market under the symbol "CSON."
As more fully described herein, in addition to the shares being
distributed, on or shortly after the Distribution Date the Company anticipates
having outstanding options to purchase an aggregate of approximately 2,477,000
shares of Common Stock under its stock option plans as a result of (i) new
option grants to employees and directors of the Company, (ii) the restructure
and exchange of options to purchase shares of Collagen Common Stock held by
former employees and directors of Collagen and (iii) offers the Company may make
to exchange options held by former employees and directors of Cohesion
Corporation, a 99% owned subsidiary of the Company ("Cohesion Corporation"), for
options to purchase Common Stock.
As a result of certain transfers made to the Company by Collagen in
connection with the Distribution and pursuant to the Intercompany Agreements (as
defined), the Company owns substantially all of the businesses and assets of,
and is responsible for substantially all of the liabilities relating to
Collagen's activities in hemostatic devices, biosealants, adhesion prevention
barriers, orthopedic products and programs and the development of recombinant
human collagen and thrombin as more fully described herein.
IN REVIEWING THIS INFORMATION STATEMENT, MATTERS DESCRIBED UNDER THE CAPTION
"RISK FACTORS," COMMENCING ON PAGE 9 SHOULD BE CAREFULLY CONSIDERED.
NO VOTE OF THE STOCKHOLDERS OF COLLAGEN IS REQUIRED IN CONNECTION WITH THE
DISTRIBUTION. NOTWITHSTANDING THIS, COLLAGEN IS SEEKING THE VOTE OF THE COLLAGEN
HOLDERS TO APPROVE THE DISTRIBUTION. THE COMPANY IS NOT SOLICITING THE COLLAGEN
HOLDERS OR ANY OTHER PERSONS FOR A PROXY AND REQUESTS THAT NO PROXIES BE SENT TO
IT.
THE COMMON STOCK HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Preliminary Information Statement is June 26, 1998.
<PAGE> 4
SUMMARY
The following is a summary of certain information contained elsewhere in
this Information Statement. Reference is made to, and this summary is qualified
by, the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires,
references in this Information Statement (i) to Collagen include Collagen and
its subsidiaries and (ii) to the Company prior to the Distribution Date refer to
the Transferred Businesses (as defined). Additionally, unless otherwise
indicated, all information contained in this Information Statement assumes: (i)
completion of the Distribution (as defined) to be effected on the Distribution
Date (as defined), (ii) the buyback by the Company after the Distribution of the
remaining Cohesion Corporation shares, and (iii) conversion of all outstanding
shares of the Company's preferred stock into shares of Common Stock. With the
exception of the historical information contained herein, this Information
Statement contains forward-looking statements that involve risks and
uncertainties. The Company's actual results and the results of and effect of the
Distribution could differ materially from those described herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
THE COMPANY
Cohesion Technologies, Inc. (the "Company") is focused on developing and
commercializing proprietary surgical products, including bioresorbable
hemostatic devices and biosealants for tissue repair and regeneration, which
increase the effectiveness of and minimize complications following open and
minimally invasive surgeries. CoStasis(TM) atraumatic hemostat ("CoStasis"), the
Company's lead hemostatic product candidate, designed for use initially in
cardiothoracic indications, is currently in a multi-site, randomized, pivotal
clinical trial in Europe. In 1998, the Company expects to complete the trial and
file for CE Mark. The Company has received an Investigational Device Exemption
(an "IDE") from the United States Food and Drug Administration (the "FDA") and
has commenced U.S. pivotal trials of CoStasis, targeting cardiac, hepatic,
orthopedic and general surgery indications. CoSeal(TM) surgical sealant
("CoSeal"), the Company's lead biosealant product candidate, designed for
sealing organs and other tissues resulting from surgical wounds and incisions,
is expected to commence European clinical trials by the end of 1998. Industry
experts estimate that the potential worldwide market for fibrin sealants and
surgical adhesives is $850 million annually. Industry experts also estimate that
the potential surgical sealant marketplace is $650 million annually. The Company
believes its surgical products will provide several distinct advantages over
currently available technologies, including ease of preparation and use, novel
delivery systems, improved safety profiles and clinical effectiveness. The
Company sells Collagraft(R) implant ("Collagraft"), an orthopedic product, and
has research and development programs in other orthopedic areas and in
recombinant human collagen and thrombin. The Company's products and programs are
based on a platform of proprietary technologies centered around collagen and
hydrophilic polymers that quickly polymerize in vivo and bind to tissue.
Hemostatic Devices. The current U.S. market for hemostatic devices, which
are used during surgery to stop diffuse bleeding and seal wounds, is served by a
limited range of collagen-based sponge and powder products which, although
widely used, have limited effectiveness and can be difficult to apply. Outside
of the United States, a broader range of autologous and homologous fibrin
sealant products are used, but are time-consuming to prepare, difficult to use,
and provide less effective tissue adherence than needed in diverse clinical
settings. Fibrin sealants provide a liquid, atraumatic hemostat which flows
across tissue surfaces and provides a fibrin matrix. The Company believes that
CoStasis, a collagen based hemostatic sealant, can offer distinct advantages
over fibrin sealants and currently available products in the United States,
including faster hemostasis, greater mechanical strength, enhanced product
safety and improved preparation, handling and performance characteristics.
Biosealants. Biosealants are used to seal organs to prevent leakage of
bodily fluids through wounds or incisions from surgery. Predominant applications
include sealing the sutured closure (anastomoses) of blood vessels, intestines,
and fallopian tubes, as well as organ incisions in cardiovascular surgery,
abdominal and pelvic surgery, neurosurgery and urology. Although industry
experts estimate the worldwide market for
2
<PAGE> 5
surgical wound closure products to be over $2.0 billion annually, a relatively
small number of biosealants are being widely commercialized due to limitations
inherent in the underlying technology. Industry experts have estimated that 1.5
million surgeries in the United States each year are sealant candidates. The
Company is developing CoSeal, a biosealant based on the Company's proprietary
reactive polyethylene-glycol ("PEG") polymer technology, which the Company
believes can offer distinct advantages over current procedures, including
complete resorbability, improved elasticity, sealing strength, general tissue
adherence and greater ease of application.
Orthopedics. The Company's commercialized Collagraft implant product is a
collagen-based bone graft substitute designed to provide a scaffolding around
which new bone can grow, thereby eliminating the need for painful autograft
procedures. Pursuant to the terms of certain intercompany agreements between the
Company and Collagen, the Company has agreed to assume Collagen's relationship
with the marketing partner for Collagraft, Zimmer, Inc. ("Zimmer"), a subsidiary
of the Bristol-Myers Squibb Company. The Company is also developing a
collagen-based bone anchor product with Innovasive Devices, Inc. ("Innovasive").
Additionally, the Company is conducting research and development activities in
the treatment of osteoarthritis, the most prevalent form of arthritis in the
United States. See "Business -- Orthopedics," "Business -- Manufacturing" and
"Business -- Sales, Marketing and Distribution."
Other Development Programs. The Company is conducting preclinical studies
with an adhesion prevention barrier product, CoStop(TM), based on its
proprietary PEG-polymer technology, designed to prevent the formation of
debilitating or painful internal tissue adhesions after surgery. According to
industry experts, an estimated 4.5 million U.S. surgeries each year are at risk
for adhesion formation, including most abdominal and gynecological surgeries, as
well as many cardiothoracic and orthopedic surgeries. The Company also is
conducting preclinical studies with a resorbable sealant for use in vascular
catheterization procedures to prevent post-operative bleeding. The Company is
also developing recombinant human collagen and thrombin to serve as an
alternative to bovine collagen and bovine thrombin in its products in an effort
to develop a wider range of innovative surgical products.
Objectives and Strategy. The Company's objective is to develop, manufacture
and commercialize innovative tissue repair and regeneration products, with the
initial goal of rapidly exploiting its proprietary technology in the areas of
surgical hemostats and sealants. The Company's strategy consists of the
following key elements:
- Initial Focus on Large Markets. The Company is focusing initially on the
commercial development of hemostatic and sealant products for cardiothoracic and
cardiovascular surgery indications procedures. The Company estimates that there
are approximately 9.3 million open and minimally invasive cardiovascular,
hepatic, orthopedic and general surgeries performed each year in the United
States in which hemostatic products may be used and approximately 1.4 million
such surgeries performed each year in the United States in which sealant
products may be used.
- Leverage Competitive Advantages. The Company is conducting a 100-patient,
multi-center, randomized clinical trial of CoStasis in Europe, controlled
against conventional medical practices, including fibrin sealants, and expects
to differentiate its products through ease of preparation, novel delivery
systems, clinical effectiveness and safety. CoStasis uses autologous plasma
(derived from the patient), as opposed to homologous plasma (derived from pooled
blood sources), thereby eliminating the potential infectious disease risks
inherent in the use of pooled blood-derived products.
- Targeted Regulatory Classification and Distribution. The Company believes
that CoStasis and CoSeal will be classified as medical devices in Europe and the
United States, generally requiring less onerous, less costly and shorter
regulatory approval processes than if classified as biological agents or drugs.
Initial distribution in Europe is planned through geographically focused,
specialty cardiovascular distributors with existing customer relationships and
established sales infrastructures. In the United States, the Company plans to
target the concentrated cardiovascular surgery segment with a direct sales force
to maximize operating margins and plans to consider additional distribution
arrangements for other surgical specialties such as general surgery, gynecology
and orthopedics.
3
<PAGE> 6
- Expand into Other Surgical Markets. The Company believes that its
technology and initial product formulations may also be applied to additional,
non-cardiac, high-volume procedures. The Company is developing hemostatic and
sealant indications in colon-rectal (e.g., colon resections), hepatic (e.g.,
liver transplants) and orthopedic (e.g., bone grafts) surgeries, including both
open and minimally invasive surgical techniques. The Company believes that its
technology platform is highly scaleable and will enable it to expand into
additional markets over time.
- Capitalize on Intellectual Property Portfolio. The Company believes it
has substantial design, manufacturing and applications engineering expertise in
the development of biomaterials and delivery systems which, when combined with
its intellectual property portfolio, will enable it to expand into additional
markets by cost-effectively addressing unmet surgical needs for ease of
preparation, ease of use, efficacy and safety.
- Develop and Maintain Close Relationships with Leading Professionals
Worldwide. The Company strives to maintain close relationships with leading
scientists, surgeons and other healthcare professionals worldwide who are
dedicated to expanding the use of biomaterials for hemostatic and sealant
applications, and to identify unmet surgical needs. The Company plans to
actively assist and support educational and training programs for and the
research efforts of such professionals.
------------------------
Cohesion Corporation was founded in December 1993 as Otogen Corporation
("Otogen"), by Rodney Perkins, M.D., and Collagen to focus on the development of
medical devices in the fields of otology and neurosurgery. In January 1996, this
focus was shifted primarily to the fields of hemostasis, biosealants and
adhesion prevention devices, and Otogen's name was changed to Cohesion
Corporation. In December 1997, Collagen increased its interest in Cohesion
Corporation to approximately 99%. Effective January 1, 1998, Collagen
transferred to the Company certain assets and liabilities, including its
interest in Cohesion Corporation, as described below. The Company intends after
the Distribution to acquire the balance of the shares of Cohesion Corporation.
Collagen is in the process of seeking stockholder approval of the Distribution,
and the Distribution is contingent upon prior receipt of a ruling from the
Internal Revenue Service that the Distribution will not result in recognition of
taxable income or taxable gain to Collagen or its stockholders. The Company's
headquarters are located at 2500 Faber Place, Palo Alto, California 94303 and
its telephone number is (650) 354-4300.
For additional information regarding the Distribution, please refer to the
Collagen 1998 Proxy Statement. The Company's Registrar, Transfer Agent and
Distribution Agent may be contacted at the Bank of New York, N.A. at (212)
815-6955.
------------------------
CoStasis, CoSeal and CoStop are trademarks of the Company. This Information
Statement also includes trade names and trademarks of companies other than the
Company. The use of any such third party trade name or trademark herein is
editorial only, and to the benefit of the owner thereof, with no intention of
commercial use or infringement of such trade name or trademark.
4
<PAGE> 7
THE DISTRIBUTION
<TABLE>
<S> <C>
Common Stock to be outstanding after the Distribution....... 8,861,034 shares(1)
Nasdaq NMS Symbol........................................... CSON
</TABLE>
- ---------------
(1) Represents 8,861,034 shares being distributed in connection with the
Distribution. Excludes approximately 2,477,000 shares of Common Stock
issuable upon exercise of options which the Company may issue under the
Company's stock option plans on or shortly after the Distribution Date.
DISTRIBUTING CORPORATION...... Collagen Corporation, a Delaware corporation.
DISTRIBUTED CORPORATION....... Collagen transferred to the Company, effective
January 1, 1998, pursuant to the Intercompany
Agreements (as defined) substantially all of
the assets of, and responsibility for
substantially all of the liabilities associated
with Collagen's activities in hemostatic
devices, biosealants, orthopedic products and
programs, adhesion prevention barriers and the
development of recombinant human collagen and
thrombin, as more fully described herein, as
well as certain other equity interests,
including interests in Boston Scientific
Corporation ("Boston Scientific") and
Innovasive, which had an aggregate market value
of $83.9 million, at March 31, 1998.
Collectively, the assets transferred pursuant
to the Intercompany Agreements are referred to
herein as the "Transferred Businesses."
RETAINED BUSINESSES........... Collagen will retain all of the businesses (the
"Retained Businesses"), other than the
Transferred Businesses. Following the
Distribution, Collagen plans to change its name
to Collagen Aesthetics, Inc.
PRIMARY PURPOSES OF THE
DISTRIBUTION.................. To separate the Transferred Businesses so that
the Company and Collagen will be in an improved
position (i) to adopt strategies and pursue
objectives appropriate to specific businesses
and industries and thereby achieve, among other
things, potential cost savings, (ii) to
implement more focused incentive compensation
arrangements that are tied more directly to
results of operations, (iii) to be recognized
by the financial community as separate and
distinct businesses, and (iv) to facilitate
raising additional capital in the private and
public markets. See "The Distribution."
SHARES TO BE DISTRIBUTED AND
OUTSTANDING................... Approximately 8,861,034 shares of Common Stock.
In addition to the 8,861,034 shares being
distributed on or shortly after the
Distribution Date, the Company anticipates
having outstanding options to purchase an
aggregate of approximately 2,477,000 shares of
Common Stock under its stock option plans, as a
result of (i) new option grants to employees
and directors of the Company, (ii) the
restructure and exchange of options to purchase
Collagen Common Stock held by former employees
and directors of Collagen and (iii) offers the
Company may make to exchange options held by
former employees and directors of Cohesion
Corporation for options to purchase Common
Stock. See "Description of Capital Stock."
DISTRIBUTION RATIO............ Each Collagen Holder will receive one share of
Common Stock of the Company for every one share
of Collagen Common Stock held on the Record
Date. On June 25, 1998, there were 8,861,034
shares of Collagen Common Stock outstanding.
QUOTATION AND TRADING
MARKET........................ The Company has applied to have the Common
Stock quoted on the Nasdaq National Market
under the symbol "CSON."
RECORD DATE................... The close of business on ,
1998.
5
<PAGE> 8
DISTRIBUTION DATE............. The Distribution Agent will distribute on or
shortly after , the
Distribution Date certificates representing the
Company Common Stock to the Collagen Holders.
DISTRIBUTION AGENT............ The Bank of New York, N.A. (the "Distribution
Agent").
TAX CONSEQUENCES.............. It is a condition for the completion of the
Distribution that a ruling be obtained from the
Internal Revenue Service that the Distribution
will not result in recognition of taxable
income or gain to Collagen or its stockholders
under Section 355 and Section 368 of the
Internal Revenue Code of 1986, as amended (the
"Code"). In the event that such ruling is not
obtained, the Distribution will not be
effected. See "The Distribution." See also The
Collagen 1998 Proxy Statement, "The
Spinoff -- Certain Federal Income Tax
Consequences of the Spinoff."
DIVIDEND POLICY............... The Company has never paid any cash dividends
and does not anticipate paying cash dividends
in the foreseeable future.
RELATIONSHIP WITH COLLAGEN
POST-DISTRIBUTION............. Following the Distribution, Collagen and the
Company will be independent public companies
and their relationship will be governed solely
by the terms of the Intercompany Agreements (as
defined). See "Relationship Between the Company
and Collagen After the Distribution."
RISK FACTORS.................. The matters discussed under "Risk Factors"
commencing on page 9 of this Information
Statement should be carefully considered.
6
<PAGE> 9
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenue -- product sales........... $ 1,198 $ 4,302 $ 3,546 $ 3,612 $ 2,527 $ 2,075 $ 1,472
Costs and expenses:
Cost of sales.................... 539 1,991 1,961 2,404 2,105 1,902 816
Research and development......... 2,957 3,284 3,416 4,268 9,627 6,634 11,309
General and administrative....... 2,627 2,815 2,726 3,120 7,153 5,245 3,820
Purchased in-process research and
development.................... -- -- -- 3,000 -- -- 10,530
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses................ 6,123 8,090 8,103 12,792 18,885 13,781 26,475
-------- -------- -------- -------- -------- -------- --------
Loss from operations............... (4,925) (3,788) (4,557) (9,180) (16,358) (11,706) (25,003)
Other income (expense), net........ 19,077 (592) 4,209 79,545 23,834 8,590 13,992
Provision for income taxes,
minority interest and, in 1993,
cumulative effect of change in
accounting for income taxes...... 6,963 (475) 553 31,691 2,495 (391) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................. $ 7,189 $ (3,905) $ (901) $ 38,674 $ 4,981 $ (2,725) $(11,011)
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 3,648
Working capital............................................. 1,313
Investment in Boston Scientific............................. 75,455
Total assets................................................ 95,577
Long-term liabilities....................................... 32,123
Total stockholder's and parent company equity............... 59,573
</TABLE>
- ---------------
(1) The summary historical consolidated financial data of the Company has been
prepared from the audited consolidated financial statements of the Company
for each of the three years in the period ended June 30, 1997 and the
unaudited consolidated financial statements as of March 31, 1998 and for the
nine months ended March 31, 1997 and 1998 included herein. Financial
information for each of the two years in the period ended June 30, 1994, has
been prepared from unaudited consolidated financial statements not included
herein. The financial information may not reflect the Company's future
performance or the future financial position or results of operations of the
Company, nor does it provide or reflect data as if the Company had actually
operated as a separate, stand-alone entity during the periods covered. Per
share data has not been presented as no common shares are outstanding and
such information would not be meaningful. The summary financial data should
be read in conjunction with the consolidated financial statements and
related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included elsewhere in this Information
Statement. In the opinion of the Company's and Collagen's management, the
unaudited consolidated financial statements as of March 31, 1998, for the
years ended June 30, 1993 and 1994 and for the nine months ended March 31,
1997 and 1998 contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results
of operations for these periods.
7
<PAGE> 10
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, 1997 MARCH 31, 1998
------------------------------------ ------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales............... $ 2,527 $ -- $ 2,527 $ 1,472 $ -- $ 1,472
Costs and expenses:
Cost of sales........................ 2,105 (589) 1,516 816 48 864
Research and development............. 9,627 (1,313) 8,314 11,309 (1,015) 10,294
General and administrative........... 7,153 -- 7,153 3,820 -- 3,820
Purchased in-process research and
development........................ -- -- -- 10,530 -- 10,530
-------- ------- -------- -------- ------- --------
Total costs and expenses...... 18,885 (1,902) 16,983 26,475 (967) 25,508
-------- ------- -------- -------- ------- --------
Loss from operations................... (16,358) 1,902 (14,456) (25,003) 967 (24,036)
Other income (expense), net............ 23,834 -- 23,834 13,992 -- 13,992
Provision for income taxes and minority
interest............................. 2,495 723 3,218 -- -- --
-------- ------- -------- -------- ------- --------
Net income (loss)............. $ 4,981 $ 1,179 $ 6,160 $(11,011) $ 967 $(10,044)
======== ======= ======== ======== ======= ========
Basic net income (loss) per share(2)... $ 0.70 $ (1.13)
======== ========
Diluted net income (loss) per
share(2)............................. $ 0.69 $ (1.13)
======== ========
Shares used in computing basic net
income (loss) per share(2)........... 8,804 8,901
======== ========
Shares used in computing diluted net
income (loss) per share(2)........... 8,930 8,901
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 3,648
Working capital............................................. 1,313
Investment in Boston Scientific............................. 75,455
Total assets................................................ 95,577
Long-term liabilities....................................... 32,123
Total stockholder's and parent company equity............... 59,573
</TABLE>
- ---------------
(1) The summary unaudited pro forma consolidated financial data presented is
theoretical in nature and not necessarily indicative of the future results
of operations or financial position of the Company or the results of
operations and financial position which would have resulted had the Company
been a stand-alone company during the periods presented. The pro forma
financial data reflects certain additions and adjustments to the historical
results related to (i) transfer price arrangements under the Company's
supply agreements with Collagen, and (ii) research and development expenses
associated with the reimbursement of costs under the Company's development
arrangements with Collagen. The pro forma statement of operations data
assumes that the Distribution occurred prior to July 1, 1996. The pro forma
balance sheet data assumes that the Distribution occurred on March 31, 1998.
This information has been prepared from the unaudited pro forma consolidated
financial information of the Company included elsewhere in this Information
Statement. The summary pro forma financial data should be read in
conjunction with the unaudited pro forma consolidated financial information
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Information
Statement.
(2) See Note 5 of Notes to Unaudited Pro Forma Consolidated Financial
Information for a description of the basis of determining net income (loss)
per share information.
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<PAGE> 11
RISK FACTORS
The following Risk Factors should be considered carefully, in addition to
the other information contained in this Information Statement. When used in this
Information Statement, the words "expects," "anticipates," "intends," "plans,"
"estimates" and similar expressions are intended to identify forward looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed below and
elsewhere in this Information Statement. Actual results could differ materially
from those projected in the forward looking statements as a result of the risk
factors discussed below and elsewhere in this Information Statement.
ABSENCE OF HISTORY AS AN INDEPENDENT COMPANY
Prior to being contributed to the Company by Collagen, the Transferred
Businesses were part of an operating group at Collagen, the Collagen
Technologies Group. The Company does not have an operating history as an
independent company. As is the case with many distributions, the preparation and
completion of the Distribution may result in some temporary dislocation of, and
inefficiencies in the business, operations, organization and personnel structure
of the Company. Collagen is not required to provide assistance or services to
the Company, except as described in the Intercompany Agreements, and, it is
incumbent upon the Company to establish an identity separate from Collagen.
Although the Company intends to invest substantial resources in the future to
increase capital market and industry awareness of its activities, there can be
no assurance that such investment will actually increase such awareness, and
failure to achieve such awareness could have a material adverse effect on the
Company. The Company has not operated as a public company, and following the
Distribution it will continue to incur increasing costs and expenses associated
with being a public company. See "-- No Prior Public Market; Volatility of
Common Stock Price;" "-- History of Operating Losses; Uncertainty of Future
Profitability;" "-- Intense Competition;" "Business;" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company's historical results of operations discussed in this
Information Statement and contained in the financial statements and related
notes, included in this Information Statement, reflect the historical operations
of the Transferred Businesses contributed by Collagen to the Company. The
financial statements of the Company included herein may not necessarily reflect
the results of operations, financial position and cash flows of the Transferred
Businesses had the Company been operated as an independent entity during the
periods presented. The Company has incurred operating losses in each of the past
five years, including operating losses of $4.6 million, $9.2 million, $16.4
million and $25.0 million in fiscal 1995, 1996, 1997 and for the nine-month
period ended March 31, 1998, respectively. The Company's operating losses have
resulted primarily from expenses incurred in connection with the Company's
research and development activities, including preclinical and clinical trials,
development of manufacturing processes and general and administrative expenses
and the Company expects that such expenses will continue to increase for the
foreseeable future. While the Company had sales of Collagraft bone products of
$1.9 million and $1.1 million for the year ended June 30, 1997 and the nine
months ended March 31, 1998, respectively, the Company does not expect such
sales to increase substantially in the future. Such sales at their present
levels do not contribute, in a material way, to the Company's revenues. The
Company's ability to achieve and sustain operating profitability is highly
dependent upon obtaining in a timely and efficient fashion, regulatory approval
for and successfully commercializing its products in development, particularly
the CoStasis atraumatic hemostatic device and the CoSeal surgical sealant and
developing sales and marketing capabilities for its products, both in Europe,
the United States and other markets. There can be no assurance that the Company
will obtain required regulatory approvals in a timely fashion, if at all, or
successfully develop, manufacture, commercialize and market products or that the
Company will ever record significant product revenues or achieve operating
profitability. Operating profitability, if achieved, may not be sustained. See
"-- Absence of History as an Independent Company;" "-- Dependence on Boston
Scientific Stock;" "-- No Prior Public Market; Volatility of Common Stock
Price;" "-- Uncertainties Related to Early Stage of Commercialization and
Development;" "-- Gov-
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<PAGE> 12
ernment Regulation;" "-- Intense Competition;" "Management's Discussion and
Analysis of Financial Condition and Results of Operations;" and "Business."
UNCERTAINTIES RELATED TO COMMERCIALIZATION AND DEVELOPMENT
Except for Collagraft, the Company's orthopedic implant product, which is
currently marketed by Zimmer, and the Company's Vitrogen, Cell Prime, Zygen,
Angiostat and other bulk collagen products (collectively the "Intermediate
Products"), all of the Company's products are in research or preclinical or
clinical development. The Company has not received marketing approval for any of
its products from the FDA or any other international regulatory body. The
development and commercialization of new products are highly uncertain, as is
the timing associated with these activities. Among other things, potential
products that may appear to the Company to be promising may not reach the market
for a number of reasons, including the possibilities that the potential products
will be found to be ineffective or to cause harmful side effects during
preclinical testing or clinical trials, will fail to receive necessary
regulatory approvals, will be difficult to manufacture on a commercial scale,
will be uneconomical, will fail to achieve market acceptance or will be
precluded from commercialization by the proprietary rights of third parties. No
assurance can be made that any of the Company's development programs will be
successfully completed, that clinical trials will generate anticipated results
or will commence or be completed as planned. Additionally, there can be no
assurance that the Company will be able to obtain CE Mark in Europe, on a timely
basis, if at all, or that any premarket approval ("PMA") application will be
accepted or ultimately approved by the FDA on a timely basis, if at all, or that
any products for which approval is obtained will be commercially successful. If
any of the Company's development programs are not successfully completed in a
timely fashion, required regulatory approvals are not obtained in a timely
fashion, or products for which approvals are obtained are not commercially
successful, the Company's business, financial condition and results of
operations will be materially and adversely affected. See "-- Early Stage of
Clinical Trials and Lack of Extensive Clinical Data;" "-- Uncertainty of Market
Acceptance;" "-- Government Regulation; No Assurance of Regulatory Approvals"
and "Business."
UNCERTAINTIES RELATED TO CLINICAL TRIALS AND LACK OF EXTENSIVE CLINICAL DATA
Although the Company's lead product candidate, CoStasis, is in clinical
trials in Europe and the United States, clinical data obtained to date has been
insufficient to demonstrate its safety and efficacy under applicable FDA
regulatory guidelines. Although the Company is currently conducting a
100-patient, multi-site, randomized, pivotal human clinical trial in Europe
using CoStasis in cardiothoracic surgery indications and expects that the
results of this trial will be sufficient to form the basis for an application
for CE Mark in Europe, significant additional clinical data will be required
prior to submission of a PMA application in the United States. There can be no
assurance that any of the Company's product candidates will receive CE Mark in
Europe or marketing approval from the FDA in a timely fashion, if at all.
Additionally, clinical trials may identify significant technical or other
obstacles that must be overcome prior to obtaining necessary regulatory or
international approvals. Such obstacles could delay progress in the development
and commercialization of the Company's current product candidates. Adverse
events related to the use of the Company's product candidates may occur during
clinical trials, and any such events may require suspension or termination of
clinical trials, and the filing of reports with the FDA and other applicable
U.S. and international regulatory authorities. Such events could negatively
impact the Company's ability to achieve successful development and
commercialization of its products. If the Company's products under development
do not prove to be safe and effective in clinical trials, or if the Company is
otherwise unable to commercialize these products successfully, the Company's
business, financial condition and results of operations will be materially and
adversely affected. See "Business" and "-- Government Regulation; No Assurance
of Regulatory Approvals."
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's CoStasis atraumatic hemostat is a device designed to control
diffuse capillary and small vein bleeding, and the Company's CoSeal biosealant
is a device designed to seal anastomoses and sites of incision, in connection
with surgery. There can be no assurance that either of these products will gain
commercial acceptance among physicians, patients and health care payors, even if
necessary international and
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<PAGE> 13
U.S. marketing approvals are obtained. The Company believes that recommendations
and endorsements by physicians will be essential for market acceptance of its
surgical products, and there can be no assurance that any such recommendations
or endorsements will be obtained. The Company believes that surgeons will not
use the Company's products unless they determine, based on clinical data and
other factors, that the products are an effective means of controlling bleeding
and sealing anastomoses and sites of incision, and that the clinical benefits to
the patient and cost savings achieved through use of these systems outweigh
their cost. Acceptance among physicians may also depend upon the Company's
ability to train surgeons and other potential users of the Company's products in
the application of sprayable surgical products, which they typically have not
used, and the willingness of such users to learn these new techniques.
Additional factors in achieving market acceptance may include the Company's
ability to address competition from U.S. and international medical device,
pharmaceutical and biopharmaceutical companies, to develop a marketing and sales
force, to form strategic partnerships and to manufacture price- and
cost-effective products. Failure of the Company's products to achieve
significant market acceptance will have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Intense Competition;" "-- Lack of Marketing and Sales Capabilities;" and
"Business -- Products."
DEPENDENCE ON BOSTON SCIENTIFIC STOCK TO FUND OPERATIONS
Historically, Collagen has used sales of Boston Scientific stock to fund
operations and investments, and, in connection with the activities surrounding
the Distribution, Collagen transferred to the Company, effective January 1,
1998, all of its equity interest in Boston Scientific. Sales of Boston
Scientific common stock contributed pre-tax gains of approximately $6.0 million,
$85.8 million and $9.1 million in fiscal years 1995, 1996 and 1997,
respectively. As of March 31, 1998, the Company owned approximately 1.1 million
shares of Boston Scientific common stock, valued at $75.5 million, based on a
market price of $67.50 per share on such date as reported on the New York Stock
Exchange. The Company has implemented a "protect" strategy based on purchases of
put options and sales of call options in combination, commonly known as an
"equity collar," covering 650,000 shares of its Boston Scientific holdings.
While the strategy is designed to minimize downside risk of loss should the
stock price decline below approximately $63.00 and allow for limited upside
participation should the stock price rise above approximately $98.00, there can
be no assurance that the Company will be able to sell the remaining unhedged
shares of Boston Scientific common stock at attractive prices if, when and as
needed. Failure to achieve such sales could jeopardize the Company's ability to
fund its operations and require it to engage in additional financing
alternatives, some of which might be dilutive. The market price of Boston
Scientific common stock is highly volatile and, as a medical device
manufacturer, the Company believes that Boston Scientific is subject to a number
of the same factors affecting its operations as the Company. Readers are
encouraged to review the Boston Scientific reports Boston Scientific files with
the Securities Exchange Commission for a detailed description of the nature of
Boston Scientific's business and the risks and uncertainties associated with it.
Any significant downward fluctuation in the market price for Boston Scientific
common stock could adversely impact the Company's earnings due to lower amounts
realized on any sales by the Company of such stock and would decrease the value
of the Company's total assets as stated on its balance sheet resulting from a
lower carrying value for the Boston Scientific investment, which as of March 31,
1998, represented approximately 79% of the value of the Company's total assets.
See "-- Uncertainty of Access to Capital;" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
NO PRIOR PUBLIC MARKET; VOLATILITY OF COMMON STOCK PRICE
Prior to the Distribution, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained after the Distribution, that sufficient market support will be
obtained or sustained or that the market price of the Common Stock will not
decline below the price on the Distribution Date or shortly thereafter. In
recent years, the stock market in general, and the stock prices of medical
device and life sciences companies in particular, have experienced extreme price
fluctuations, sometimes without regard to the operating performance of
particular companies. The market price of the Common Stock is likely to be
highly volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products, clinical trial results, announcements
regarding strategic alliances, domestic and
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<PAGE> 14
international government regulation, developments in patent or other proprietary
rights, public concern as to the safety of products developed by the Company or
its competitors or other parties. Additionally, changes in U.S. and
international healthcare policies, future sales of substantial amounts of Common
Stock by existing stockholders, changes in estimates of and comments by
securities analysts and general market and economic conditions may have an
adverse effect on the market price of the Common Stock. In addition, the
realization of any of the risks described herein in "Risk Factors" could have a
dramatic and material adverse impact on the market price of the Common Stock.
Following a fluctuation in the market price of a corporation's securities,
securities class action litigation has often resulted. There can be no assurance
that such litigation will not occur in the future with respect to the Company.
Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse impact
on the Company's business, financial condition and results of operations. See
"-- No Prior Public Market; Volatility of Common Stock Price;" "-- Absence of
History as an Independent Company;" "History of Operating Losses; Accumulated
Deficit;" "Uncertainty of Future Profitability;" "-- Dilutive Impact of Future
Equity Issuances;" and "Business."
RELATIONSHIP BETWEEN THE COMPANY AND COLLAGEN
Conflicts of interest may arise between the Company and Collagen in a
number of areas relating to their past and ongoing relationships, including tax
and employee benefit matters and indemnity arrangements.
The Company and Collagen have entered into the Intercompany Agreements for
the purpose of defining certain relationships between them. The Company believes
that the Intercompany Agreements will minimize conflicts of interest between the
Company and Collagen. However, in the event that conflicts arise, the Company
believes that each entity will have an experienced management infrastructure in
place to deal with such conflicts. Should conflicts persist which cannot be
resolved at each entity's executive level, the Intercompany Agreements provide
for arbitration as a final means of resolution. The terms of such agreements may
limit the Company's operating flexibility. The Company and Collagen may also
enter into material transactions and agreements in the future. There can be no
assurance that any such arrangements and transactions will be at least as
favorable as could be obtained from third parties. See "Relationship Between the
Company and Collagen After the Distribution."
INTENSE COMPETITION
The Company anticipates that it will compete with many domestic and foreign
medical device, pharmaceutical and biopharmaceutical companies and organizations
across each of its product categories and areas in which it is conducting
research and development activities. In the hemostatic and biosealant areas, the
Company believes in the United States that it will face strong competition from
existing methodologies for controlling bleeding and sealing wounds resulting
from surgery, such as hemostatic powders and sponges, collagen-based hemostats
and traditional sutures and staples marketed by companies such as Johnson &
Johnson, United States Surgical Corporation and American Home Products
Corporation. In addition, the Company believes that it will face competition
from more recent products and technologies, such as those developed by Focal,
Inc. ("Focal") and Fusion Medical Technologies, Inc. ("Fusion"). Outside of the
United States, other competitive products currently being marketed include
fibrin sealants, sold in Europe and the Pacific Rim countries by Immuno AG and
Centeon L.L.C. In addition, in the United States, there are several fibrin
sealants under development including those by the American Red Cross, Baxter
Healthcare Corporation, Convatec, a subsidiary of the Bristol-Myers Squibb
Company, Haemacure Corporation and V.I. Technologies, Inc. (Vitex). In addition
to conventional fibrin sealants, there are a number of other products in
late-stage development using either collagen or polymer technologies, made by
Focal and Fusion, as well as another class of sealants called cyanoacrylates. In
the orthopedics area, the Company's Collagraft bone graft products face
competition from synthetic bone graft substitutes from Interpore International,
and Osteotech, Inc. Additionally, several companies and institutions are engaged
in the development of collagen-based materials, techniques, procedures and
products for use in medical applications the Company anticipates addressing with
its current and proposed products and research programs.
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<PAGE> 15
Also, other recently developed technologies or procedures are, or may in
the future be, the basis of competitive products. There can be no assurance that
the Company's current competitors or other parties will not succeed in
developing alternative technologies and products that are more effective, easier
to use or more economical than those which have been or are being developed by
the Company or that would render the Company's technology and products obsolete
and uncompetitive in these fields. In such event, the Company's business,
financial condition and results of operations would be materially and adversely
affected.
Many of the Company's current and potential competitors, including, but not
limited to those listed above, have substantially greater financial,
technological, research and development, regulatory and clinical, marketing and
sales and personnel resources than the Company. These competitors may also have
greater experience in developing products, conducting clinical trials, obtaining
regulatory approvals, and manufacturing and marketing such products. Certain of
these competitors may obtain approval or clearance by the FDA or foreign
countries, achieve product commercialization or obtain patent protection earlier
than the Company. Any of these circumstances could materially and adversely
affect the Company. Also, to the extent the Company commences manufacturing
activities, it will also face competition with respect to manufacturing
efficiency and marketing capabilities, areas in which it currently has limited
experience. Failure of the Company to address competition in this area could
have a material adverse impact on the Company, its financial condition and
results of operations. See "Business -- Competition;"
"Business -- Manufacturing."
UNCERTAINTIES RELATED TO INTELLECTUAL PROPERTY
The Company's success will depend on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
There can be no assurance that the Company's pending or future patent
applications will issue, or that the claims of the Company's issued patents, or
any patents that may issue in the future, will provide any competitive
advantages for the Company's products or that they will not be successfully
challenged, narrowed, invalidated or circumvented in the future. Moreover,
litigation and interference or opposition proceedings associated with obtaining,
enforcing or defending patents or trade secrets is expensive and can divert the
efforts of technical and management personnel. The Company has filed patent
applications in certain foreign countries corresponding to certain patent
applications that it has filed in the United States and may file additional
patent applications inside and outside the United States. The Company believes
that obtaining foreign patents may be more difficult than obtaining domestic
patents because of differences in patent laws and believes the protection
afforded by foreign patents or any other foreign intellectual property
protection, if obtained, may be more limited than that provided domestically. In
addition, there can be no assurance that competitors will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use, offer for sale, sell and import its products. The Company
is aware that certain medical device, pharmaceutical and other companies,
universities and research institutions have filed patent applications or have
issued patents relating to compositions and methods for wound closure and
adhesion prevention. In addition, the medical device and pharmaceutical
industries have been characterized by litigation regarding patents and other
intellectual property rights, and many companies in the medical device industry
have employed intellectual property litigation to gain a competitive advantage.
There can be no assurance that litigation will not be brought against the
Company by third parties in the future challenging the Company's patent rights
or claiming infringement by the Company of patents held by the third parties.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the medical products industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. While the Company intends to seek patent
protection for its proprietary technology, products and processes, there can be
no assurance as to the success or timeliness in obtaining any such patents, that
the breadth of claims obtained, if any, will provide adequate protection of the
Company's proprietary technologies, products and processes, or that the Company
will be able to adequately enforce any such claims to protect its proprietary
technology, products and processes. Because patent applications in the United
States are confidential until the patents issue, and publication of discoveries
in the scientific and patent literature
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<PAGE> 16
tends to lag behind actual discoveries by several months, the Company cannot be
certain that Company inventors or licensors were the first to conceive of
inventions covered by pending patent applications or that the Company was the
first to file patent applications for such inventions. The Company may desire or
may be required to obtain licenses to patents or proprietary rights of others.
No assurance can be given that any licenses required under any patents or
proprietary rights of third parties would be made available on terms acceptable
to the Company, or at all. If the Company does not obtain such licenses, it
could encounter delays in product introductions while it attempts to design
around or otherwise avoid such patents, or it could find that the development,
manufacture or sale of products requiring such licenses is foreclosed.
Litigation may be necessary to defend against or assert claims of patent
infringement or invalidity, to enforce or defend patents issued to the Company,
to protect trade secrets or know-how owned by the Company, or to determine the
scope and validity of the proprietary rights of others. In addition,
interference proceedings in the U.S. Patent and Trademark Office, or opposition
proceedings in a foreign patent office, may be necessary to determine the
priority of inventions with respect to patent applications of the Company or its
licensors. Litigation, interference or opposition proceedings could result in
substantial costs to and diversion of effort by the Company, and adverse
determinations in any such proceedings could prevent the Company from
manufacturing, marketing or selling its products and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with collaborative partners, vendors, suppliers,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
See "-- Competition;" "Business -- Intellectual Property."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
The Company's existing and proposed products, its research and development
and planned commercialization activities are subject to regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies. The Federal Food, Drug and Cosmetic Act (the "FDC
Act"), as amended, the regulations promulgated thereunder, and other federal and
state statutes and regulations, govern, among other things, the preclinical and
clinical testing, manufacturing conditions, device safety, efficacy, labeling
and storage, record keeping, advertising and the promotion of medical devices
and drugs. Product development and approval within this regulatory framework
take a number of years and involve the expenditure of substantial resources.
Additionally, in order for the Company to market its products in Europe and
other foreign countries, the Company and/or its partners, if any, must obtain
required regulatory approvals and comply with extensive regulations governing
safety, quality and manufacturing processes. These regulations vary
significantly from country to country. The time required to obtain approval to
market the Company's products outside the United States may be longer or shorter
than that required in the United States. In order to market the products being
developed by the Company in the member countries of the European Union, the
Company will be required to obtain CE Mark certification. CE Mark certification
is an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. In the first half
of 1998, the Company completed a successful quality systems audit to the ISO
9001/EN46001 and Medical Devices Directive requirements, which is one of the
principal steps in the CE Mark process. The remainder of the CE Mark process
consists primarily of review by the approving body of additional documentation
submitted by the Company to document each product's clinical safety and
performance. Although a quality system audit has been completed, there can be no
assurance that the Company will be successful in completing the remainder of the
CE Mark certification process or obtaining CE Mark certification, in a timely
manner, if at all.
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In the United States, medical devices are classified into three different
classes (Class I, Class II and Class III) on the basis of controls deemed
necessary to reasonably ensure the safety and effectiveness of the device. Class
I devices are subject to general controls (relating to labeling, premarket
notification and adherence to FDA's good manufacturing practices ("GMPs"),
recently codified in the quality system regulation (the "QSR")). Class II
devices are subject to general and special controls (relating to performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness. Class III devices are generally
life-sustaining, life-supporting and implantable devices, or new devices which
have been found not to be substantially equivalent to legally marketed devices.
Before a new medical device can be marketed, marketing clearance must be
obtained through a premarket notification under Section 510(k) of the FDC Act or
a premarket approval ("PMA") application under Section 515 of the FDC Act. A
510(k) clearance will typically be granted by the FDA if it can be established
that the device is substantially equivalent to a "predicate device," which is a
legally marketed Class I or Class II device or a preamendment Class III device
(i.e., one that has been marketed since a date prior to May 28, 1976) for which
the FDA has not called for PMAs. The FDA has been requiring an increasingly
rigorous demonstration of substantial equivalence and this may include a
requirement to submit human clinical trial data. It generally takes four to
twelve months from the date of a 510(k) submission to obtain clearance, but it
may take longer. The FDA may determine that a medical device is not
substantially equivalent to a predicate device, or that additional information
is needed before a substantial equivalence determination can be made. A "not
substantially equivalent" determination, or a request for additional
information, could prevent or delay the market introduction of new products that
fall into this category. For any devices that are cleared through the 510(k)
process, modifications or enhancements that could significantly affect the
safety or effectiveness, or that constitute a major change in the intended use
of the device, will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
preamendment Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission includes the proposed labeling,
advertising literature, and any training materials. The PMA can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing. Upon receipt
of a PMA application, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If the FDA
determines that the PMA application is sufficiently complete to permit a
substantive review, the FDA will accept the application for filing. Once the
submission is accepted for filing, the FDA begins an in-depth review of the PMA.
The FDA review of a PMA application generally takes one to three years from the
date the PMA is accepted for filing, but may take significantly longer. The
review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of clinicians
and others knowledgeable in the applicable field, may be convened to review and
evaluate the application and provide a recommendation to the FDA as to whether
the device should be approved. The FDA accords substantial weight to the
recommendation but is not bound by it. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure compliance with applicable QSR requirements, which include extensive
requirements relating to product design, manufacturing processes, testing,
control documentation and other quality assurance procedures.
If the FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When, and if, those conditions
have been fulfilled to the satisfaction of the FDA, the FDA will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be
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<PAGE> 18
delayed for one or more years while additional clinical trials are conducted and
submitted in an amendment to the PMA. Modifications to a device that is the
subject of an approved PMA, its labeling or manufacturing process may require
approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA often
require the submission of the same type of information required for an initial
PMA, except that the supplement is generally limited to that information needed
to support the proposed change from the product covered by the original PMA.
If human clinical trials of a device are required, either for a 510(k)
premarket notification or a PMA application, and the device presents a
"significant risk," the sponsor of the trial must file an investigational device
exemption ("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs, without the need for FDA review.
Submission of an IDE provides no assurance that the FDA will approve the IDE.
Even if the IDE is approved, there can be no assurance that the FDA will
determine that the data derived from the studies support the safety and efficacy
of the device or warrant the continuation of clinical studies. Sponsors of
clinical trials are permitted to sell investigational devices distributed in the
course of the study, provided such compensation does not exceed recovery of the
costs of manufacture, research, development and handling. An IDE supplement must
be submitted to and approved by the FDA before a sponsor or investigator may
make a change to the investigational plan that may affect its scientific
soundness or the rights, safety or welfare of human subjects.
The Company anticipates that its products in development will be regulated
as Class III medical devices and will require PMA approval prior to being
marketed in the United States. If this is the case, the Company will need to
obtain for each of its products an IDE in order to conduct clinical trials in
the United States. There can be no assurance that the Company will receive Class
III medical device designation for its products or that it will be able to
obtain IDEs for each of its planned products or that data from such clinical
studies if and when commenced will demonstrate the safety and effectiveness of
the Company's product or will adequately support a PMA application.
If clearance or approval for a given product of the Company is obtained,
such product will be subject to pervasive and continuing regulation by the FDA.
For example, the Company will be subject to routine inspection by the FDA and
will have to comply with the host of regulatory requirements that usually apply
to medical devices marketed in the United States, such as labeling regulations,
applicable QSR requirements, the Medical Device Reporting ("MDR") regulations
(which require a manufacturer to report to the FDA certain types of adverse
events involving its products), and the FDA prohibitions against promoting
products for unapproved or "off-label" uses. Any failure by the Company to
comply with applicable regulatory requirements could result in the detention or
seizure of products, issuance of an enjoinment of future product activities and
the assessment of civil and criminal penalties against the Company, its officers
and its employees. Failure to comply with the regulatory requirements could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, regulations regarding the manufacture and
sale of the Company's products are subject to change. The Company cannot predict
the effect, if any, that such changes might have on its prospects, business,
financial condition or results of operations.
In November 1997, the President of the United States signed into law the
FDA Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDC Act and other provisions in the FDC Act affecting the
regulation of devices. Among other things, the changes will affect the IDE,
510(k) and PMA processes, and also will affect device standards and data
requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third party review, and the
dissemination of off label information. The Company cannot predict how or when
these changes will be implemented or what effect the changes will have on the
regulation of the Company's products.
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Although the Company anticipates that its products in development will be
classified by the FDA as medical devices, in the event that a given product is
classified by the FDA as a drug, it will require FDA approval of a new drug
application ("NDA") prior to commercialization in the United States. The NDA
process is generally more onerous, costly and lengthy than the PMA process,
often requiring more extensive preclinical and clinical testing. Many products
for which NDAs have been submitted by other companies have never been approved
for marketing. Before clinical studies of a new drug can begin, an
investigational new drug ("IND") application must be submitted to the FDA. FDA
regulations provide that human clinical trials may begin thirty days following
submission of an IND application, unless the FDA advises otherwise or requests
additional information, clarification or additional time to review the
application. An IND application contains extensive preclinical data and
information about the drug. There can be no assurance that the Company will
develop sufficient data and information to submit an IND for its products or
that such data and information if submitted, would be sufficient for the
purposes of commencing clinical studies of the products. Delays in the receipt
of or failure to obtain FDA authorization to begin or continue clinical trials
could have a material adverse effect on the Company's business, financial
condition or results of operations.
The FDA regulates the manufacturing, product testing, and marketing of both
medical devices and drugs. Manufacturers of drugs are required to comply with
applicable GMP and, in the case of medical devices, QSR requirements, which
include requirements relating to product design, manufacturing processes,
product testing, and quality assurance, as well as the corresponding maintenance
of records and documentation. There is no assurance that the Company will be
able to comply with the applicable QSR requirements. In addition, the Company is
required to provide information to the FDA on death or serious injuries alleged
to have been associated with the use of its medical devices, as well as product
malfunctions that would likely cause or contribute to death or serious injury if
the malfunction were to recur. Failure of the Company to comply with the QSR
regulation, or other FDA regulatory requirements, could have a material adverse
effect on the Company's business, financial conditions, or results of
operations.
CoStasis contains thrombin, which is a FDA-licensed biological drug.
Consequently, the FDA considers CoStasis to be a combination product subject to
jurisdiction by the Center for Biologics Evaluation and Research ("CBER") and
the Center for Devices and Radiological Health ("CDRH"). The FDA has assigned
lead review responsibility to CDRH following a "Request for Designation"
determination by the FDA in September 1996. The Company believes that this
decision was significant, as fibrin sealants containing human plasma are
regulated as biological drugs, which may substantially increase the duration and
complexity of their regulatory approval processes compared to that of CoStasis.
Although CoStasis is considered to be a combination product, consistent with
lead review responsibility being assigned to CDRH the product will be regulated
primarily as a device. Consequently, the Company has filed an IDE application
for CoStasis, and it is currently conducting clinical studies pursuant to the
IDE. If the clinical data collected from these studies is satisfactory, the
Company will file a PMA with the FDA seeking marketing approval for CoStasis.
There can be no assurance that the data from these studies will demonstrate the
safety and effectiveness of CoStasis to the satisfaction of the FDA, and
consequently there can be no assurance that CoStasis will be approved for
commercial marketing by the FDA.
With respect to CoSeal, the Company believes that the product will be
regulated by the FDA as a medical device because similar biosealant products of
other manufacturers have been classified and regulated as medical devices by the
FDA. The Company expects to begin clinical studies of CoSeal in the second half
of 1998, after filing an IDE application with the FDA, and would expect to seek
marketing clearance from the FDA at the conclusion of those studies. The Company
expects that the pathway towards marketing clearance will require the filing of
a PMA with the FDA, although there is a possibility based on prior
administrative precedents that the FDA will agree to review CoSeal as a 510(k)
premarket notification. In any event, there can be no assurance that the FDA
will agree that the clinical study results, once submitted, will have adequately
demonstrated the safety and effectiveness of CoSeal.
The collagen used in the Company's products is derived from the cow hides
of U.S. cattle. Bovine Spongiform Encephalopathy ("BSE") is a disease, commonly
known as mad cow disease, initially reported in cattle in the United Kingdom,
characterized by degenerative lesions of the central nervous system. The source
of infections in animals derives from eating infected sheep-derived feed. While
the disease has been reported
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in European countries, the Company is not aware of any reports of BSE in U.S.
cattle to date and, currently, the Company relies on a "closed herd" of U.S.
cattle to provide its bovine collagen-based products. There can be no assurance
that the various foreign or domestic regulatory authorities will not raise
issues regarding BSE or other matters which may adversely affect the Company's
ability to manufacture, market or sell its bovine collagen-based products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON AND VARIABILITY OF THIRD PARTY REIMBURSEMENT
Reimbursement and health care payment systems in international markets vary
significantly by country. In connection with international product
introductions, the Company and any future strategic marketing partners may be
required to seek international reimbursement approvals. If required, there can
be no assurance that any such approvals will be obtained in a timely manner, or
at all, and failure to receive such international reimbursement approvals could
have an adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices similar to the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, there will be no separate,
additional reimbursement for the Company's products. Accordingly, the Company
believes that there will be no procedure-specific reimbursement codes for the
Company's products and therefore no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either governmental or private reimbursement systems. Furthermore,
the Company could be adversely affected by changes in reimbursement policies of
governmental or private health care payors. Failure by physicians, hospitals and
other users of the Company's products to obtain sufficient reimbursement from
health care payors for procedures in which the Company's products are used or
adverse changes in governmental and private third party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
business may also be materially and adversely affected by the continuing efforts
of government and third-party payors to contain or reduce the costs of health
care through various means. See "Business -- Third Party Reimbursement."
DILUTIVE IMPACT OF FUTURE EQUITY ISSUANCES
Holders of Common Stock will experience dilution to the extent that
additional shares of Common Stock are issued by the Company and to the extent
that options to purchase Common Stock are exercised. Currently, the Company has
authorized (i) options to purchase 2,607,000 shares of Common Stock under the
1998 Stock Option Plan, of which it anticipates options to purchase
approximately 2,447,000 shares of Common Stock will be issued and outstanding on
or shortly after the Distribution Date; (ii) options to purchase 268,000 shares
of Common Stock under the Directors' Plan, of which it anticipates options to
purchase 30,000 shares of Common Stock will be issued and outstanding on or
shortly after the Distribution Date; and (iii) 250,000 shares of Common Stock
reserved for issuance under the Company's Employee Stock Purchase Plan, none of
which have been issued.
LIMITED MANUFACTURING CAPACITY
The Company anticipates that it will manufacture and package its final
products and that it will use outside contractors for other functions, such as
non-proprietary, high volume processes. There can be no assurance that the
Company will be able to attract, train and retain the required personnel or will
be able to increase its manufacturing capability to manufacture commercial
quantities of its planned products in a timely manner, or at all. Manufacturers
often encounter difficulties in scaling up production of their products,
including problems involving production yields, quality control and assurance,
component supply and shortages of qualified personnel and the Company may
encounter similar problems. The Company can make
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<PAGE> 21
no assurance that its manufacturing scale-up efforts will be successful, or,
that if needed, high-volume manufacturing can be established or maintained at
commercially reasonable costs on a timely basis, if at all. Any of these factors
could have an material adverse effect on the Company's ability to develop and
commercialize its products, which in turn would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company purchases raw materials used in its products from various
suppliers. For example, the Company purchases all of its requirements for
collagen materials from Collagen, pursuant to the terms of the Intercompany
Agreements. These materials have generally been readily available in the
marketplace and have not been the subject of shortages. There can, however, be
no assurance that the Company or its suppliers or contract manufacturers will
not experience materials shortages in the future. In addition, Collagen relies
on a "closed herd" of cattle in order to produce its bovine collagen-based
products. In the event of any material diminution in the size of the herd for
any reason, including accident or disease, Collagen's ability to quickly
increase the supply of acceptable cattle is quite limited. Any such diminution
would have a material adverse effect on the Company's ability to sell bovine
collagen-based products and, as a result, the Company's business, financial
condition and results of operations. Any such future shortages of materials or
components could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and to list its products with the FDA. As such, the Company is
subject to inspections by the FDA for compliance with applicable QSR
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. In addition, prior to international
commercialization, the Company will be required to attain and maintain
compliance with ISO 9001 standards. Failure to either attain or maintain
compliance with the applicable regulatory requirements of various regulatory
agencies would have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the Company and the
third-party manufacturers of its products are required to comply with various
FDA requirements for design, safety, advertising and labeling. The Company has
not yet undergone an FDA QSR inspection and does not anticipate that it will
undergo such an inspection until after submission of its initial PMA application
for its CoStasis hemostat product. See "Business -- Manufacturing."
Complex medical devices, such as the Company's products, can experience
performance problems in the field that require review and possible corrective
action by the manufacturer. There can be no assurance that component failures,
manufacturing errors or design defects that could result in an unsafe condition
or injury to the patient will not occur. If any such failures or defects were
deemed serious, the Company could be required to withdraw or recall products,
which could result in significant costs to the Company. There can be no
assurance that market withdrawals or product recalls will not occur in the
future. Any future product problems could result in market withdrawals, recalls
of products, or product liability litigation which could have a material adverse
affect on the Company's business, financial condition or results of operations.
LACK OF MARKETING AND SALES CAPABILITIES
The Company currently has no experience in marketing or selling its
products under development and does not have a significant marketing and sales
staff. In order to achieve commercial success for any product approved by the
FDA, the Company must either develop a marketing and sales force or enter into
arrangements with third parties to market and sell its products. If the Company
develops its own marketing and sales capabilities, it will compete with other
companies that currently have experienced and well-funded marketing and sales
operations. To the extent that the Company enters into co-promotion or other
marketing and sales arrangements with other companies, any revenues to be
received by the Company will be dependent on the efforts of others, and there
can be no assurance that such efforts will be successful. Additional factors in
achieving market acceptance may include the Company's ability to address
competition from domestic and foreign medical device, pharmaceutical and
biopharmaceutical companies, develop a marketing and sales force, form strategic
partnerships and manufacture price- and cost-effective products. See
"Business -- Sales, Marketing and Distribution."
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UNCERTAINTY OF ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT, EMPLOYEES AND
CONSULTANTS
The Company is highly dependent on the principal members of its management
and scientific staff. The loss of services of any of these personnel could
impede the achievement of the Company's development objectives. Furthermore,
recruiting and retaining qualified scientific personnel to perform research and
development work in the future will also be critical to the Company's success.
There can be no assurance that the Company will be able to attract and retain
personnel on acceptable terms given the competition among biotechnology,
pharmaceutical and healthcare companies, universities and non-profit research
institutions for experienced scientists. In addition, the Company relies on
members of its Scientific Advisory Board and Clinical Advisory Board and a
significant number of consultants to assist the Company in formulating its
research and development strategy. All of the Company's consultants and the
members of the Company's Scientific Advisory Board and Clinical Advisory Board
are employed by employers other than the Company, and may have commitments to,
or advisory or consulting agreements with, other entities that may limit their
availability to the Company. See "Management."
UNCERTAINTY OF ACCESS TO CAPITAL
The Company may require substantial additional funding in order to finance
its research and product development programs, including for preclinical testing
and clinical trials of its product candidates, for operating expenses and for
the pursuit of regulatory approvals for its product candidates, and may require
additional funding for establishing manufacturing and marketing capabilities in
the future. The Company currently believes that its existing capital resources,
including its holdings in Boston Scientific and interest income from cash
investments, will be sufficient to satisfy its current and projected funding
requirements. The Company's future capital requirements will depend on many
factors, including continued scientific progress in its research and development
programs, the magnitude of these programs, progress with preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
if any, the costs involved in filing and prosecuting patent applications and
enforcing patent claims, the impact of competing technological and market
developments, the establishment of strategic alliances, the cost of
manufacturing and of commercialization activities and the cost of product
in-licensing. There can be no assurance that the Company's cash, cash
equivalents and marketable securities, including its Boston Scientific stock and
interest income earned on cash investments, will be adequate to satisfy its
capital and operating requirements and the Company may need to pursue
opportunities to obtain debt or equity financing. There can be no assurance that
such additional financing will be available on reasonable terms, if at all. Any
additional equity financings would be dilutive to the Company's stockholders. If
adequate funds are not available, the Company may be required to curtail
significantly one or more of its research and development programs or obtain
funds through arrangements that may require it to relinquish rights to certain
of its technologies or product candidates. See "-- Dependence on Boston
Scientific Stock" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
POTENTIAL PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
The use of any of the Company's potential products in clinical trials, and
the sale of any approved products, may expose the Company to liability claims
resulting from the use of its products. These claims might be made directly by
consumers, health care providers or by pharmaceutical companies or others
selling such products. The Company has obtained product liability insurance
coverage, subject to policy limits of $5 million per occurrence and in the
aggregate, with a $10,000 per occurrence and $50,000 in the aggregate
self-insured deductible, for its clinical trials. The Company intends to expand
its insurance coverage to include the sale of commercial products if marketing
approval is obtained for products in development. However, insurance coverage is
becoming increasingly expensive, and no assurance can be given that the Company
will be able to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect the Company against losses due to liability. There
can also be no assurance that the Company will be able to obtain commercially
reasonable product liability insurance for any products approved for marketing.
A successful product liability claim or series of claims brought against the
Company could have a material and adverse effect on its business, financial
condition and results of operations. See "Business -- Product Liability and
Insurance."
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HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company's research and development processes involve the controlled use
of hazardous materials, including flammable liquids and corrosive liquids, and
in lesser quantities, corrosive solids, flammable solvents, flammable gases,
oxidizers, air and water reactive compounds, carcinogens and poisons and
radioactive materials. The Company is subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
The Company believes that it is in compliance in all material respects with
applicable environmental laws and regulations. Accordingly, it does not expect
to make material capital expenditures for environmental control facilities in
the near-term. However, there can be no assurance that it will not be required
to incur significant costs to comply with environmental laws and regulations in
the future, or that the operations, business or assets of the Company will not
be materially and adversely affected by the costs of compliance with current or
future environmental laws or regulations.
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation does not provide for cumulative
voting in the election of directors. In addition, the Board of Directors of the
Company may issue shares of Preferred Stock without stockholder approval on such
terms as the Board may determine. The Company's Bylaws require advance notice of
matters of business to be brought before meetings of stockholders. The Company's
Certificate of Incorporation prohibits stockholders from acting by written
consent. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. Further, the Company is subject to Section 203 of
the Delaware General Corporation Law which, subject to certain exceptions,
restricts certain transactions and business combinations between a corporation
and a stockholder owning 15% or more of the corporation's outstanding voting
stock (an "interested stockholder") for a period of three years from the date
the stockholder becomes an interested stockholder. See "Description of Capital
Stock."
ABSENCE OF CASH DIVIDENDS
The Company has never paid any cash dividends and does not anticipate
paying cash dividends in the foreseeable future. See "Dividend Policy."
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THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
The Distribution is designed to separate the aesthetic and reconstructive
cosmetic products business of Collagen from the surgical tissue repair and
regeneration business of the Company. The Distribution will result in the
formation of two publicly traded companies, each of which will pursue an
independent strategic path. Collagen's Board believes the separation will offer
both new entities the opportunity to pursue strategic objectives appropriate to
different businesses and to create targeted incentives for their management and
key employees. In addition, the Distribution is expected to offer each entity
the financial flexibility to raise capital on a more cost effective basis.
Collagen's Board considered the following, which it believes represent all of
the material factors related to the Distribution in making its decision to
approve the Distribution:
Business and Market Rationale
The Distribution will enable two companies with distinct strategic,
financial, and operating goals to adopt strategies and pursue objectives
appropriate to their respective core businesses. The Distribution will allow
each entity to pursue its corporate objectives independent of the operations and
policies of the other. Following the Distribution, Collagen will continue to
focus on its aesthetic and reconstructive cosmetic business. This business is
expected to be cash flow positive and focused on further product development and
commercialization. Collagen plans to implement a strategy which will maintain
its leadership in the intensely competitive aesthetic and reconstructive product
market. This strategy will focus on extending Collagen's market penetration,
building a development platform and continuing to develop the innovative
products which have been a historical source of Collagen's growth. The Company
in turn will focus on the development, clinical testing and market launch of
bioresorbable hemostatic devices and biosealants for tissue repair and
regeneration in surgical markets, as well as activities relating to the
marketing of Collagraft and the Intermediate Products.
Cost of Equity Capital
Following the Distribution, both Collagen and the Company may elect to
raise additional capital to facilitate growth. As independent publicly traded
entities, Collagen and the Company will each have greater flexibility in their
equity capital raising efforts and will be able to more efficiently pursue their
respective capital raising strategies in both the private and public markets.
Moreover, the Distribution will enable both Collagen and the Company to lower
the effective cost of equity capital borne by current Collagen stockholders.
Management Focus and Employee Incentives
The Distribution will enable both companies to own and focus on their
respective businesses. Collagen's aesthetic and reconstructive products business
and the Company's biocompatible materials business are sufficiently distinct in
terms of technology, stage of product development and commercialization, market
focus and other factors such that it is more advantageous for both to operate
and be managed as separate entities. The Distribution is expected to allow
management and employees of each company to focus on their respective paths of
innovation in product development and marketing, thereby enhancing the ability
of each to optimize productivity and growth. In addition, the Distribution is
intended to allow each company to provide both management and employees with
targeted equity compensation arrangements thereby optimizing the economic
incentives each entity will be able to provide its respective employees.
In addition, the Collagen Board considered the potentially negative impact
which the Distribution could have on the operations of the two companies,
including: (i) failure to achieve or sustain the support of the Collagen
stockholders in the separately traded stock of the Company or Collagen and (ii)
the smaller initial size of each independent entity relative to Collagen
presently and potential inefficiencies and duplication of costs that might
result. The Collagen Board concluded, however, that the Distribution offered
each entity the opportunity to tailor its business strategy and expenditure of
resources to the anticipated needs of its respective markets and that the
potential benefits to each company of consummating the Distribution outweighed
the foreseeable risks.
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FAIRNESS OPINION
Opinion of Collagen's Financial Advisor
Lehman Brothers has served as financial advisor to Collagen in connection
with the Distribution and delivered a written opinion (the "Lehman Opinion") to
Collagen's Board dated April 16, 1998, to the effect that, as of the date of the
Lehman Opinion and based on and subject to the assumptions, limitations and
qualifications set forth therein, from a financial point of view, the
Distribution is fair to the stockholders of Collagen.
THE FULL TEXT OF THE LEHMAN OPINION IS ATTACHED AS APPENDIX A TO THIS
INFORMATION STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. REFERENCE SHOULD
BE MADE TO THE LEHMAN OPINION FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND
OTHER MATTERS CONSIDERED BY LEHMAN BROTHERS. THE SUMMARY OF THE LEHMAN OPINION
SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE LEHMAN OPINION.
No limitations were imposed by Collagen on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion, except that Lehman Brothers was not authorized to solicit, and did
not solicit, any indications of interest from any third party with respect to
the purchase of all or part of Collagen's or the Company's business. In arriving
at its opinion, Lehman Brothers did not ascribe a specific range of values to
Collagen, but rather made its determination as to the fairness of the
Distribution to the Collagen stockholders, from a financial point of view, on
the basis of the financial and comparative analyses described below. The Lehman
Opinion is for the use and benefit of the Collagen Board and was rendered to the
Collagen Board in connection with its consideration of the Distribution. The
Lehman Opinion is not intended to be and does not constitute a recommendation to
any holder of the Collagen Common Stock as to how such stockholder should vote
with respect to the Distribution. Lehman Brothers was not requested to opine as
to, and its opinion does not address, Collagen's underlying business decision to
proceed with or effect the Distribution.
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (1) the
specific terms of the Distribution, (2) the Proxy Statement, Collagen's annual
report on Form 10-K for the year ended June 30, 1997 and such other publicly
available information concerning Collagen that Lehman Brothers believed to be
relevant to its analysis, (3) financial and operating information with respect
to the business, operations and prospects of Collagen and the Company, furnished
to Lehman Brothers by Collagen, (4) a trading history of Collagen Common Stock
and a comparison of that trading history with those of other companies that
Lehman Brothers deemed relevant, (5) a comparison of the historical financial
results and present financial condition of Collagen with those of other
companies that Lehman Brothers deemed relevant, and (6) a comparison of the
historical financial results and present financial condition of the Company with
those of other companies that Lehman Brothers deemed relevant. In addition,
Lehman Brothers had discussions with the management of Collagen concerning the
businesses, operations, assets, financial conditions and prospects of Collagen
and the Company (including on a pro forma basis) and undertook such other
studies, analyses and investigations as it deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of management of Collagen
that they were not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial projections
of Collagen and the Company following the Distribution, upon advice of Collagen,
Lehman Brothers assumed that such projections were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of Collagen as to the future financial performance of Collagen and
the Company and that Collagen and the Company will perform substantially in
accordance with such projections. In arriving at its opinion, Lehman Brothers
did not conduct physical inspection of the properties and facilities of Collagen
or the Company and did not make or obtain any evaluations or appraisals of the
assets or liabilities of Collagen or the Company. Lehman Brothers has assumed
that the Distribution will be a tax-free transaction to the stockholders of
Collagen. The Lehman Opinion necessarily is based upon market, economic and
other conditions as they exist on, and can be evaluated as of, the date of the
Lehman Opinion.
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The process by which securities trading markets establish a market price
for any security is complex, involving the interaction of numerous factors, and
market prices will fluctuate with changes of, among other factors, the financial
condition, business and prospects of the issuer and comparable companies and
economic and financial market conditions. In addition, trading in shares of the
Company will likely be characterized by a period of redistribution among
stockholders of Collagen who receive such shares in the Distribution, which may
temporarily depress the market price of such shares during such period.
Accordingly, Lehman Brothers expresses no opinion as to the prices at which
shares of Collagen Common Stock or the Company's Common Stock actually will
trade following the consummation of the Distribution. The Lehman Opinion should
not be viewed as providing any assurances that the combined market value of the
shares of Collagen Common Stock after consummation of the Distribution and the
shares of the Company's Common Stock to be received by a stockholder of Collagen
pursuant to the Distribution will be in excess of the market value of the shares
of Collagen Common Stock owned by such stockholder at any time prior to
announcement of consummation of the Distribution.
The following is a summary of all material certain financial and
comparative analyses performed by Lehman Brothers and presented to the Collagen
Board.
Lehman Brothers compiled financial and stock market statistics for a number
of comparable medical technology and healthcare companies for both Collagen and
the Company. For Collagen, these companies were divided into: (i) medical
technology companies: Biomatrix, Inc., EMPI, Inc., Lifecore Biomedical, Inc.,
ReSound Corporation, UroMed Corporation, VISX, Inc. and Vivus, Inc.; (ii)
cosmetic laser companies: Coherent, Inc. and Palomar Medical Technologies, Inc.;
and (iii) medical collagen technology companies: Integra Lifesciences
Corporation, Kensey Nash Corporation and Perclose, Inc. No single company or
group of companies is directly comparable to Collagen's business. Based on
publicly available information and various assumptions and estimates as
published by IBES, Lehman Brothers calculated various arithmetic and statistical
comparisons, including market values, price earnings ratios and price earning
ratios divided by each company's respective 5-year median growth rate.
A separate comparable company analysis was developed for the Company. These
comparable companies were divided into: (i) tissue repair and wound healing
companies: Advanced Tissue Sciences, Inc., Creative Biomolecules, Inc., Genzyme
Corporation (Tissue Repair), Integra Lifescience Corporation, Lifecore
Biomedical, Inc. and Organogenesis, Inc.; (ii) orthopedic related companies:
Innovasive, Orthologic Corporation and Osteotech, Inc.; and (iii) surgical wound
healing and tissue repair companies: Anika Corp., Closure Medical Corporation,
Cryolife, Inc., Focal, Inc., Fusion Medical Technologies, Inc., Gliatech, Inc.
and ThermoGenesis Corporation. Based on publicly available information and
various assumptions and estimates as published by IBES, Lehman Brothers
calculated various arithmetic and statistical comparisons, including market
values, technology values and a comparison of technology platforms.
Lehman Brothers also analyzed Collagen's historical stock price performance
on an absolute basis and compared to its comparable companies and the Standard &
Poor's 400 index. The analysis indicated that the market price of Collagen
Common Stock has underperformed the comparable companies relative to most of the
ratios and comparisons analyzed.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial and comparative analysis
and the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at its opinion, Lehman Brothers did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgements as to the significance and relevance of each factor and
analysis. Accordingly, Lehman Brothers believes that its analyses must be
considered as a whole and that considering any portion of such analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the process underlying its opinion. In its analyses,
Lehman Brothers made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of Collagen. Any estimates contained in these analyses are
not necessarily indicative of actual values or predictive of future results or
values, which may be
24
<PAGE> 27
significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
reflect the prices at which businesses actually may be sold.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Collagen Board selected Lehman
Brothers because of its expertise, reputation and familiarity with Collagen in
particular and the medical technology industry and overall healthcare industry
in general and because its investment banking professionals have substantial
experience in transactions similar to the Distribution.
As compensation for its services in connection with the Distribution,
Lehman Brothers has a signed engagement letter from Collagen which includes a
fee of $350,000 upon the delivery of its fairness opinion, which will be
credited against a success fee of $500,000 based upon the consummation of the
Distribution. In addition, Collagen has agreed to reimburse Lehman Brothers for
its reasonable expenses incurred in connection with its engagement and to
indemnify Lehman Brothers and certain related persons for certain liabilities
that may arise out of its engagement by Collagen and the rendering of the Lehman
Opinion.
In the ordinary course of its business, Lehman Brothers may actively trade
in the equity securities of Collagen for its own account and for the accounts of
Lehman Brothers' customers and, accordingly, may at any time hold a long or
short position in such securities.
MANNER OF EFFECTING THE DISTRIBUTION
In the event that the Collagen stockholders approve the Distribution
Proposal and all other conditions to the Distribution are satisfied, it is
expected that the distribution of shares of the Company's Common Stock will be
made on or shortly after the Distribution Date on a pro rata basis to the
Collagen Holders. Collagen currently intends to use a direct registration system
to implement the distribution of shares of the Company's Common Stock in the
Distribution. On the Distribution Date, a certificate representing all issued
and outstanding shares of the Company's Common Stock will be delivered by
Collagen to the Distribution Agent. As soon as practicable thereafter, an
account statement will be mailed to each stockholder stating the number of
shares of the Company's Common Stock received by such stockholder in the
Distribution. Following the Distribution, Collagen Holders may request physical
certificates for their shares of Common Stock. No fractional shares will be
issued, and stockholders who would be entitled to receive a fractional share
will instead receive a whole share of Collagen. The Collagen Holders will
receive shares of Common Stock on the basis of the distribution ratio of one (1)
share of the Company's Common Stock for every one (1) share of Collagen Common
Stock held on the Record Date. All shares of Common Stock issued in the
Distribution will be fully paid and nonassessable and the Holders thereof will
not be entitled to preemptive rights.
No Collagen Holder will be required to pay any cash or other consideration
for Common Stock received in the Distribution or to surrender or exchange shares
of Collagen Common Stock in order to receive the Common Stock. Certificates
representing outstanding shares of Collagen Common Stock will continue to
represent Collagen Common Stock, as well as rights to purchase shares of
Collagen's Series A Preferred Stock pursuant to the Rights Agreement dated as of
November 28, 1994 between Collagen and The Bank of New York as Rights Agent.
CONDITIONS; TERMINATION
The Distribution is conditioned upon the satisfaction of the following
conditions: (1) approval by the Collagen stockholders of the Distribution; (2)
receipt by Collagen of an IRS ruling that, for U.S. federal income tax purposes,
the Distribution will not result in recognition of taxable income or loss by
Collagen or stockholders of Collagen; (3) receipt of any necessary material
government approvals or third party consents; (4) no pending order, injunction
or decree preventing the consummation of the distribution; and (5) no event
shall have occurred that, in the judgment of Collagen's Board, would result in
the Distribution having a material adverse effect on Collagen, its affiliates or
its stockholders.
25
<PAGE> 28
While the Collagen Board does not intend to waive any of the conditions, it
can waive any of the conditions above if the Collagen Board believes that such
waiver is in the best interest of Collagen. If Collagen does not receive the
ruling from the IRS, and the Collagen Board decides to waive the tax-ruling
condition to the Distribution, Collagen will distribute revised proxy materials
and resolicit proxies. Even if all the above conditions are satisfied, Collagen
and the Company may cancel or defer the Distribution and the related
transactions described in the Collagen 1998 Proxy Statement at any time prior to
the Distribution Date. See "Relationship Between Collagen and the Company After
the Distribution."
INTERESTS OF CERTAIN PERSONS
As of March 31, 1998, six of the members of the Collagen Board and eight
executive officers of Collagen beneficially held outstanding shares of Collagen
Common Stock. Each such member will therefore benefit from and have a direct or
indirect interest in the approval of the Distribution transactions.
RELATIONSHIP BETWEEN THE COMPANY AND COLLAGEN AFTER THE DISTRIBUTION
Effective January 1, 1998, Collagen contributed its research and
development programs for hemostatic devices, biosealants, orthopedics products
and programs and recombinant human collagen and thrombin to the Company.
Collagen also contributed various equity investments to the Company, including
all of its holdings in Boston Scientific and Innovasive, which had an aggregate
market value of $83.9 million at March 31, 1998. The Company and Collagen have
entered into various agreements to provide for an orderly transition of matters
and to govern certain ongoing matters between the two entities and provide a
mechanism for transitioning license, supply, distribution, research and
development, tax, service and other agreements in connection with the
Distribution. These agreements, (the "Intercompany Agreements"), which are
summarized below, represent a summary of the material terms of the agreements.
Certain of the agreements summarized in this section were included as exhibits
to the Collagen Quarterly Report on Form 10-Q/A for the period ended March 31,
1998.
Separation and Distribution Agreement. The separation and distribution
agreement (the "Distribution Agreement") provides for, among other things, the
principal corporate transactions required to effect the Distribution, the
allocation of the assets and liabilities to the Company and Collagen after the
Distribution and the conditions precedent to the Distribution. Subject to
certain exceptions described below, the Distribution Agreement contains
provisions designed principally to transfer to the Company the assets related to
and the personnel currently involved in the Transferred Businesses and financial
responsibility for known and contingent or unknown liabilities of the
Transferred Businesses. In addition, certain other assets and liabilities of
Collagen were contributed to, or assumed by, the Company which include, among
others, certain fixed assets, cash and cash equivalents, stock in third party
companies, including its security holdings in Boston Scientific which had an
aggregate market value of $75.5 million at March 31, 1998, accounts receivable,
inventories, accounts payable, existing contracts and ongoing and potential
litigation. The aggregate amount of liabilities assumed by the Company was $32.1
million. Pursuant to the Distribution Agreement, Collagen and the Company will
provide each other general indemnities for claims arising from the activities of
Collagen prior to the Distribution and the activities of Collagen and the
Company after the Distribution. The Distribution may be canceled or certain
conditions of the Distribution may be waived at any time prior to the
Distribution. Such conditions include, among others, the receipt by Collagen of
a private letter ruling from the IRS as to the tax-free nature of the
Distribution and that no event or development shall have occurred that in the
judgment of the Collagen Board of Directors would result in the distribution
having a material adverse effect on Collagen or its stockholders.
Supply Agreements. Collagen and the Company have entered into certain
supply agreements, effective January 1, 1998, which provide for the supply by
Collagen to the Company of certain collagen-based products and materials for the
Company's own use and supply to third parties for a limited time prior to the
Company developing its own manufacturing facilities or locating an alternate
manufacturing source. Pursuant to the Collagraft Supply Agreement, Collagen will
supply to the Company its requirements for Collagraft in order for the Company
to fulfill its obligations under its agreement with Zimmer; until the agreement
with Zimmer is terminated. Pursuant to the Collagen Supply Agreement, Collagen
will supply to the Company its require-
26
<PAGE> 29
ments for certain collagen-based materials and products for its own use and for
supply to third parties until at least March 15, 2004.
Assignment And License Agreement. Collagen and the Company have entered
into an assignment and license agreement, effective January 1, 1998 (the
"Assignment and License Agreement"), which, among other things, allocates
Collagen's technology and intellectual property between the Company and
Collagen. Pursuant to the Assignment and License Agreement, all of Collagen's
technology and intellectual property (including patents, copyrights, trademarks
and trade secrets), other than technology relating to the breast implant
technology, has been assigned to the Company, and the Company has granted back
to Collagen an exclusive, worldwide, perpetual, fully-paid up license to such
assigned technology and intellectual property that is used solely in Collagen's
business, which consists of the development, manufacture, use, sale and other
commercialization of human aesthetics products, technologies and treatments,
breast implant products and processes, urinary incontinence and treatments and
ostomy products. The Assignment and License Agreement also provides for each of
the Company and Collagen to obtain certain rights to any improvements made by
the other company prior to March 15, 2004 solely as such improvements relate to
its business. In addition, under the Assignment and License Agreement, each of
the Company and Collagen covenant to not compete in each other's business until
March 15, 2004.
Research And Development Agreement. Collagen and the Company have entered
into a research and development agreement, effective January 1, 1998 (the
"Research and Development Agreement"), which provides for the joint development
of human recombinant collagen technology by the Company and Collagen after the
Distribution Date. The Research and Development Agreement allocates the
obligations and responsibilities of the Company and Collagen with respect to
research, development and manufacturing development of the recombinant
technology and provides for the sharing of development costs. Pursuant to the
Research and Development Agreement, the resultant recombinant technology and
related intellectual property shall be owned by the Company but shall be
exclusively licensed to Collagen for uses related to Collagen's business,
subject to the payment of royalties by Collagen to the Company.
Benefits Agreement. Collagen and the Company have entered into a benefits
agreement (the "Benefits Agreement"), effective January 1, 1998, which sets
forth the manner in which assets and liabilities under employee benefit plans
and other employment-related liabilities will be divided between Collagen and
the Company, and ensures a smooth transition for employee benefits in the
Distribution. In general, the Company will be responsible for compensation and
employee benefits relating to its employees and former employees who last worked
in the Transferred Businesses; however, Collagen will provide, at the Company's
expense, continuing health, life, disability and other insurance and retirement
benefits for the Company employees until the Company establishes its own
benefits plans.
The Benefits Agreement also provides for the treatment of outstanding
options to purchase Collagen Common Stock. At the time of the Distribution,
Collagen options will be canceled and replaced by either Company options,
options to purchase Collagen Common Stock or a combination of both, in each
case, with adjustments to the respective exercise prices for the Distribution.
These adjustments will be based upon the relative trading values of Collagen
Common Stock before giving effect to the Distribution, and the Company Common
Stock or Collagen Common Stock after giving effect to the Distribution, as the
case may be. The Company will be responsible for delivering shares of the
Company Common Stock upon exercise of the Company options, and Collagen will be
responsible for the delivery of shares of Collagen Common Stock upon exercise of
the Collagen options.
Tax Allocation and Indemnity Agreement. Collagen and the Company have
entered into the tax allocation and indemnity agreement, effective January 1,
1998 (the "Tax Agreement"), which sets forth each party's rights and obligations
with respect to payments and refunds, if any, with respect to taxes for periods
before and after the Distribution Date and related matters such as the filing of
tax returns and the conduct of audits or other proceedings involving claims made
by taxing authorities. In general, Collagen will be responsible for filing
consolidated U.S. federal and consolidated, combined U.S. income and franchise
tax returns for periods through the Distribution Date, and for paying the taxes
relating to such returns (including any subsequent adjustments resulting from
the redetermination of such tax liability by the applicable taxing authorities).
The Tax Agreement
27
<PAGE> 30
also allocates liability between Collagen and the Company for certain other
taxes arising prior to the Distribution Date and for taxes which may arise in
connection with separating the Transferred Businesses.
Pursuant to the Tax Agreement, the Company is required to indemnify
Collagen for any taxes incurred by it as a result of the Distribution being
treated as a taxable event to Collagen due to the Company engaging in certain
transactions for two years following the Distribution Date, unless the Company
shall first provide to Collagen a ruling from the IRS, or an opinion of counsel
in a form reasonably acceptable to Collagen, that the transaction will not
adversely affect the tax consequences of the Distribution. Transactions subject
to the foregoing indemnity obligations include, among other things, acquisition
of 50% or more of the stock of the Company in a transaction described under
Section 355(e)(2) of the Code, certain repurchases or issuances of the Company
Common Stock, sale, distribution or other disposition of certain assets or stock
and the discontinuance of certain businesses. Collagen and the Company have
agreed that, in general, they will indemnify each other against any tax
liability resulting from either Collagen's or the Company's breach of any
covenant or representations contained in the Tax Agreement. The Tax Agreement
also provides for cooperation with respect to certain tax matters, allocation of
certain Collagen tax liabilities arising prior to the formation of the Company
and, the exchange of information and the retention of records which may affect
the income tax liability of either party. Though valid as between the parties
thereto, the Tax Agreement is not binding on the IRS and does not affect the
several liability of Collagen, the Company and any respective subsidiaries to
the IRS for all U.S. federal taxes of the consolidated group relating to periods
prior to the Distribution Date.
Services Agreement. Collagen and the Company have entered into a services
agreement, effective January 1, 1998 (the "Services Agreement"), pursuant to
which (a) Collagen will provide the Company with financial and tax, human
resources, legal, administrative, regulatory, quality assurance, medical
affairs, and manufacturing and related services and (b) the Company will provide
Collagen with facilities, administrative, equipment, research and development,
and clinical and regulatory services (each a "Service" and collectively the
"Services"); in each case such Services to be provided until June 30, 1999. The
Services Agreement provides that up to and including the last day of the
calendar quarter in which the Distribution is effected, the user of a Service
(the "Service User") will pay to the provider of such Service (the "Service
Provider") the actual costs for rendering such Service; and thereafter, the
Service User will pay the Service Provider 120% of the salary and related costs
for personnel time spent in providing such Service and 100% of all other costs
and expenses incurred in providing such Service. Either Collagen or the Company
may terminate the purchase of any Service upon six months prior written notice,
and the Services Agreement may be extended with respect to one or more Services
by mutual written agreement of Collagen and the Company. The Services Agreement
provides that the Service Agreement shall automatically terminate if, prior to
the Distribution, a person or organization (other than Collagen) or series of
related persons or organizations acquires more than 20% of the voting securities
of the Company without the consent of the Collagen Board of Directors.
28
<PAGE> 31
COHESION TECHNOLOGIES, INC.
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The tables below set forth selected historical financial data of the
Company. This information has been prepared from the audited consolidated
financial statements of the Company as of June 30, 1996 and 1997 and for each of
the three years in the period ended June 30, 1997 and the unaudited consolidated
financial statements as of March 31, 1998 and for the nine months ended March
31, 1997 and 1998 included herein. Financial information as of June 30, 1993,
1994, 1995 and for each of the two years in the period ended June 30, 1994, has
been prepared from unaudited consolidated financial statements not included
herein. During these periods, the Company has been wholly owned by Collagen. The
historical financial information may not reflect the Company's future
performance or the future financial position or results of operations of the
Company, nor does it provide or reflect data as if the Company had actually
operated as a separate, stand-alone entity during the periods covered. Per share
data has not been presented as no common shares are outstanding and such
information would not be meaningful.
The selected historical financial data should be read in conjunction with
the consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this Information Statement. In the opinion of the
Company's and Collagen's management, the unaudited consolidated financial
statements as of June 30, 1993, 1994 and 1995 and as of March 31, 1998, for the
years ended June 30, 1993 and 1994 and for the nine months ended March 31, 1997
and 1998, contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results of
operations for these periods.
29
<PAGE> 32
COHESION TECHNOLOGIES, INC.
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA (CONTINUED)
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
----------- ----------- ----------- -------- -------- -------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales.............. $ 1,198 $ 4,302 $ 3,546 $ 3,612 $ 2,527 $ 2,075 $ 1,472
Costs and expenses:
Cost of sales....................... 539 1,991 1,961 2,404 2,105 1,902 816
Research and development............ 2,957 3,284 3,416 4,268 9,627 6,634 11,309
General and administrative.......... 2,627 2,815 2,726 3,120 7,153 5,245 3,820
Purchased in-process research and
development....................... -- -- -- 3,000 -- -- 10,530
-------- -------- -------- -------- -------- -------- -----------
Total costs and expenses..... 6,123 8,090 8,103 12,792 18,885 13,781 26,475
-------- -------- -------- -------- -------- -------- -----------
Loss from operations.................. (4,925) (3,788) (4,557) (9,180) (16,358) (11,706)) (25,003)
Other income (expense):
Net gain on investments, principally
Boston Scientific (Target
Therapeutics, Inc. ("Target")
prior to April 1997).............. 20,323 -- 5,110 82,093 9,063 9,222 13,739
Net gain on sale of investment in
Prograft Medical, Inc............. -- -- -- -- 15,395 -- --
Equity in earnings of Target(1)..... 1,455 1,675 2,417 1,430 -- -- --
Equity in losses of other
affiliates........................ (83) (762) (1,230) (1,824) (813) (730) (9)
Interest income..................... 29 25 25 378 566 386 262
Interest expense.................... (2,647) (1,530) (2,113) (2,532) (377) (288) --
-------- -------- -------- -------- -------- -------- -----------
Income (loss) before provision for
income taxes, minority interest and
cumulative effect of change in
accounting for income taxes......... 14,152 (4,380) (348) 70,365 7,476 (3,116) (11,011)
Provision for income taxes............ 6,004 (475) 553 31,718 3,162 -- --
Minority interest..................... -- -- -- (27) (667) (391) --
Cumulative effect of change in
accounting for income taxes......... 959 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -----------
Net income (loss)..................... $ 7,189 $ (3,905) $ (901) $ 38,674 $ 4,981 $ (2,725) $ (11,011)
======== ======== ======== ======== ======== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----------- ----------- ----------- -------- -------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $ 575 $ 497 $ 491 $ 11,074 $ 13,798 $ 3,648
Working capital (deficiency).......... (19,803) (25,802) (30,530) 8,463 12,033 1,313
Investment in Boston Scientific
(Target prior to 1997)(1)........... 15,823 17,499 17,570 65,841 83,874 75,455
Total assets.......................... 27,979 30,328 32,915 97,916 114,604 95,577
Long-term liabilities................. 6,859 7,413 8,206 27,260 35,131 32,123
Total stockholder's and parent company
equity (net capital deficiency)..... (750) (5,732) (8,560) 59,545 74,005 59,573
</TABLE>
- ---------------
(1) The first five months in fiscal 1996 and the 1993, 1994 and 1995 financial
information is presented with Target accounted for under the equity method.
30
<PAGE> 33
COHESION TECHNOLOGIES, INC.
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA (CONTINUED)
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The tables below set forth selected unaudited pro forma consolidated
financial data of the Company. The pro forma information presented is
theoretical in nature and not necessarily indicative of the future results of
operations or financial position of the Company or the results of operations and
financial position which would have resulted had the Company been a stand-alone
company during the periods presented. The pro forma financial data reflects
certain additions and adjustments to the historical results related to (i)
transfer price arrangements under the Company's supply agreements with Collagen,
and (ii) research and development expenses associated with the reimbursement of
costs under the Company's development arrangements with Collagen. The pro forma
statement of operations data assumes that the Distribution occurred prior to
July 1, 1996. The pro forma balance sheet data assumes that the Distribution
occurred on March 31, 1998. This information has been prepared from the
unaudited pro forma consolidated financial information of the Company included
elsewhere in this Information Statement.
The pro forma financial data should be read in conjunction with the
unaudited pro forma consolidated financial information and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Information Statement.
31
<PAGE> 34
COHESION TECHNOLOGIES, INC.
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA (CONTINUED)
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, 1997 MARCH 31, 1998
------------------------------------ ------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales............... $ 2,527 $ -- $ 2,527 $ 1,472 $ -- $ 1,472
Costs and expenses:
Cost of sales........................ 2,105 (589) 1,516 816 48 864
Research and development............. 9,627 (1,313) 8,314 11,309 (1,015) 10,294
General and administrative........... 7,153 -- 7,153 3,820 -- 3,820
Purchased in-process research and
development........................ -- -- -- 10,530 -- 10,530
-------- ------- -------- -------- ------- --------
Total costs and expenses...... 18,885 (1,902) 16,983 26,475 (967) 25,508
-------- ------- -------- -------- ------- --------
Loss from operations................... (16,358) 1,902 (14,456) (25,003) 967 (24,036)
Other income (expense):
Net gain on investments, principally
Boston Scientific.................. 9,063 -- 9,063 13,739 -- 13,739
Net gain on sale of investment in
Prograft Medical, Inc.............. 15,395 -- 15,395 -- -- --
Equity in losses of other
affiliates......................... (813) -- (813) (9) -- (9)
Interest income...................... 566 -- 566 262 -- 262
Interest expense..................... (377) -- (377) -- -- --
-------- ------- -------- -------- ------- --------
Income (loss) before provision for
income taxes and minority interest... 7,476 1,902 9,378 (11,011) 967 (10,044)
Provision for income taxes............. 3,162 723 3,885 -- -- --
Minority interest...................... (667) -- (667) -- -- --
-------- ------- -------- -------- ------- --------
Net income (loss)............. $ 4,981 $ 1,179 $ 6,160 $(11,011) $ 967 $(10,044)
======== ======= ======== ======== ======= ========
Basic net income (loss) per share(1)... $ 0.70 $ (1.13)
======== ========
Diluted net income (loss) per
share(1)............................. $ 0.69 $ (1.13)
======== ========
Shares used in computing basic net
income (loss) per share(1)........... 8,804 8,901
======== ========
Shares used in computing diluted net
income (loss) per share(1)........... 8,930 8,901
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 3,648
Working capital............................................. 1,313
Investment in Boston Scientific............................. 75,455
Total assets................................................ 95,577
Long-term liabilities....................................... 32,123
Total stockholder's and parent company equity............... 59,573
</TABLE>
- ---------------
(1) See Note 5 of Notes to Unaudited Pro Forma Consolidated Financial
Information for a description of the basis of determining net income (loss)
per share information.
32
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the related notes and the other
information included elsewhere in this Information Statement. Certain statements
in this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" are forward-looking. The forward-looking statements contained
herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. For a more detailed discussion of
these and other business risks, see "Risk Factors."
The Company is focused on developing and commercializing proprietary
surgical products, including bioresorbable hemostatic devices and biosealants
for tissue repair and regeneration, to increase the effectiveness of and
minimize complications following open and minimally invasive surgeries.
CoStasis(TM) atraumatic hemostat, the Company's lead hemostatic product,
designed for use initially in cardiothoracic indications, is currently in a
multi-site, randomized, pivotal clinical trial in Europe. In 1998, the Company
expects to complete the trial and file for CE Mark. The Company has received an
IDE from the FDA and has commenced U.S. pivotal trials targeting cardiac,
hepatic, orthopedic and general surgery indications. CoSeal(TM) surgical
sealant, the Company's lead biosealant product designed for sealing organs and
other tissues resulting from surgical wounds and incisions, is expected to
commence European clinical trials by the end of 1998. Industry experts estimate
that the annual potential worldwide market for fibrin sealants and surgical
adhesives is $850 million. Industry experts also estimate the annual potential
surgical sealant marketplace is $650 million. The Company believes its surgical
products will provide several distinct advantages over currently available
technologies, including ease of preparation and use, novel delivery systems,
improved safety profiles and clinical effectiveness. The Company also sells
Collagraft implant, an orthopedic product, and has research and development
programs in other orthopedic areas and in recombinant human collagen and
thrombin. The Company's products and programs are based on a platform of
proprietary technologies centered around collagen and hydrophilic polymers that
quickly polymerize in vivo and bind to tissue.
Prior to the Distribution, the Company has been a wholly-owned subsidiary
of Collagen. In October 1997, Collagen announced that it would proceed to
separate its Aesthetic Technologies Group and its Collagen Technologies Group
into two independent, publicly-traded companies. The Distribution is designed to
separate two distinct businesses with significant differences in their markets,
products, research needs, investment needs, employee retention and compensation
plans and plans for growth. Collagen's Board believes the separation into two
independent companies will enhance the ability of each to focus on strategic
initiatives and new business opportunities, improve cost structures and
operating efficiencies and create incentives that are more attractive and
appropriate for the recruitment and retention of key employees. As a
consequence, Collagen believes that investors will be able to evaluate better
the merits of the two groups of businesses and their future prospects. In
December 1997, Collagen purchased substantially all of the remaining outstanding
shares of Cohesion Corporation. Effective January 1, 1998, Collagen contributed
the Transferred Businesses to the Company pursuant to the terms of the
Intercompany Agreements. A description of the assets and liabilities contributed
by Collagen to the Company is contained in Note 1 of Notes to Consolidated
Financial Statements.
The Company's historical financial position and results of operations
discussed in this Information Statement and the financial statements and related
notes included in this Information Statement reflect the historical operations
of the Transferred Businesses contributed by Collagen to the Company. Prior to
being contributed to the Company by Collagen, the Transferred Businesses were
part of the Collagen Technologies Group. In particular, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
reflects the historical results of that operating group for all years presented
as if the contribution of the Transferred Businesses by Collagen to the Company
had occurred on July 1, 1992. (See Note 1 of Notes to Consolidated Financial
Statements).
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RESULTS OF OPERATIONS
Nine Months Ended March 31, 1997 and 1998
Revenues were $2.1 million and $1.5 million for the nine months ended March
31, 1997 and 1998, respectively. Sales of Collagraft bone graft products were
$1.6 million and $1.1 for the nine months ended March 31, 1997 and 1998,
respectively. The decreases were attributed to lower sales of Collagraft by
Zimmer, and therefore, lower sales from the Company to Zimmer. The Company
expects sales of Collagraft in fiscal 1998 to be at levels slightly lower than
those of fiscal 1997 due to anticipated lower sales of Collagraft by Zimmer.
A number of uncertainties exist surrounding the marketing and distribution
of Collagraft bone graft products. The Company's primary means of distribution
for the products is through a third party firm, Zimmer. The Company's business
and financial results could be adversely affected in the event that Zimmer is
unable to market the product effectively, anticipate customer demand accurately,
or effectively manage industry-wide pricing and cost containment pressures in
health care.
Cost of sales was 92% and 55% of sales for the nine months ended March 31,
1997 and 1998, respectively. The decrease in cost of sales as a percentage of
sales primarily was due to a lower allocation of fixed overhead in relation to
the total cost of production at the manufacturing facility. The smaller volume
of Collagraft relative to the quantities of other collagen-based products is the
reason for the change in the allocation of fixed overhead.
Research and development ("R&D") spending represents program-specific costs
and other indirect R&D costs related to the Transferred Businesses and allocated
to the Company. The allocation of indirect costs is based on headcount
associated with specific R&D programs and specific identifiable costs. R&D
spending was $6.6 million and $11.3 million for the nine months ended March 31,
1997 and 1998, respectively. The increase in R&D spending primarily was due to
increased activity in the tissue adhesive and biosealant programs, and the
recombinant human collagen program. The Company expects R&D spending in fiscal
1998 to be at levels higher than fiscal 1997 as a result of increased activities
in these programs.
General and administrative ("G&A") expenses were $5.2 million and $3.8
million for the nine months ended March 31, 1997 and 1998, respectively. G&A
costs represent an allocation of Collagen's expenses to the Company derived
primarily as a function of headcount and specific identifiable costs. The
decrease in spending was due to lower officer separation costs in 1998 and legal
fees as a result of the settlement of the lawsuit with Matrix Pharmaceuticals,
Inc. ("Matrix"). Future levels of G&A spending will depend on various factors,
including the level of product sales.
The charge for purchased in-process research and development ("in-process
R&D") of $10.5 million in the nine months ended March 31, 1998 was a
non-recurring charge related to the purchase of substantially all of the
remaining shares in Cohesion Corporation, including cash compensation expense of
approximately $3.8 million associated with the purchase of certain vested
employee stock options.
Gains on sales of investments were $9.2 million and $13.7 million for the
nine months ended March 31, 1997 and 1998, respectively, primarily resulting
from the sale of 330,000 and 247,340 shares of Target Therapeutics, Inc.
("Target") and Boston Scientific common stock, respectively. In April 1997,
Target was acquired by Boston Scientific and, as a result, Collagen received
approximately 1,365,200 shares of Boston Scientific common stock. Subsequent to
March 31, 1998 and through June 18, 1998, the Company sold 85,000 shares of
Boston Scientific stock which provided cash proceeds of $5.7 million. The number
of additional shares of Boston Scientific common stock sold, if any, will depend
on market conditions and the anticipated cash needs of the Company.
Interest income was approximately $386,000 and $262,000 for the nine months
ended March 31, 1997 and 1998, respectively. The decrease in interest income
primarily was due to lower average cash, cash equivalent, and short-term
investment balances.
The Company recorded no provision or benefit for income taxes on a $3.1
million loss before taxes for the nine months ended March 31, 1997 based on the
Company's anticipated pre-tax operating loss for the year and excluding
nondeductible expenses such as equity losses in affiliates. The Company recorded
no provision or benefit for income taxes on an $11.0 million loss before taxes
for the nine months ended March 31, 1998
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based upon the Company's anticipated pre-tax operating loss for the year and
excluding nondeductible expenses such as equity losses in affiliates and
in-process R&D charges related to the increase in ownership of Cohesion
Corporation.
Following the Distribution and approval by the Company's Board of
Directors, the Company anticipates offering to exchange or substitute the
outstanding options of Cohesion Corporation for options to acquire approximately
620,000 shares of Common Stock. The new options are expected to have an exercise
price substantially less than the fair market value of the Company's shares at
the time of such exchange, based on an assumed exchange ratio of 1.67 to 1 as
anticipated and to be determined by the Company's Board of Directors. Assuming
such offers are accepted by the Cohesion Corporation option holders and assuming
an expected fair value of $10.00 per share at the date of the exchange, the
Company expects to record a non-cash compensation expense of approximately $1.5
million at the date of the exchange in connection with vested options and an
additional $4.5 million of deferred compensation to be amortized during the next
three fiscal years.
Fiscal Years Ended June 30, 1995, 1996 and 1997
Revenues were $3.5 million, $3.6 million and $2.5 million for fiscal years
1995, 1996 and 1997, respectively. Sales of Collagraft bone graft products in
fiscal 1996 increased $100,000 from fiscal 1995 sales of $3.0 million. Sales of
Collagraft in fiscal 1997 were $1.9 million, a decrease of $1.2 million or 39%
from fiscal 1996 sales of $3.1 million. The $1.2 million decrease in fiscal 1997
over fiscal 1996 was due to lower sales of Collagraft by Zimmer and the
consequent decrease in sales from the Company to Zimmer.
Cost of sales as a percentage of sales was 55%, 67%, and 83% for fiscal
years 1995, 1996 and 1997, respectively. The increase in cost of sales as a
percentage of sales in fiscal 1996 over 1995 and fiscal 1997 over 1996 was due
primarily to higher unit costs.
R&D expenses increased by $852,000 or 25% in fiscal 1996 over fiscal 1995
primarily due to increased spending in the recombinant human collagen program.
R&D spending was $9.6 million in fiscal 1997, compared with $4.3 million in
fiscal 1996, an increase of $5.3 million or 126%. This increase was primarily
attributable to the inclusion of a full year of R&D expenses for the tissue
adhesive and biosealant programs as a result of Collagen increasing its
ownership percentage in Cohesion Corporation to 81% in May 1996, and, to a
lesser extent, efforts in the recombinant human collagen and orthopedic programs
in fiscal 1997.
G&A expenses were $2.7 million, $3.1 million and $7.2 million in fiscal
1995, 1996, and 1997, respectively. G&A expenses increased $394,000 or 14% from
fiscal 1995 to fiscal 1996, due primarily to the Matrix lawsuit legal fees and
the addition of a Chief Operating Officer. G&A expenses increased $4.1 million
or 129%, from fiscal 1996 to fiscal 1997, due primarily to payments made to
Collagen's former Chief Executive Officer, Howard Palefsky, in accordance with
Mr. Palefsky's separation agreement and costs associated with existing loans to
Mr. Palefsky, which payments and costs were allocated to the Company pursuant to
the Intercompany Agreements. By agreement, Mr. Palefsky will continue to serve
as a consultant to the Company during the next two years and provide general
strategic advice, especially with respect to stockholder value, as well as
operational advice to the Company. The Company made cash payments of $752,000 to
Mr. Palefsky in fiscal 1997, and will make cash payments to Mr. Palefsky during
fiscal 1998 and 1999 totaling $575,000 and $233,000, respectively. The Company
also agreed to forgive all indebtedness, aggregating $1.6 million, owed by Mr.
Palefsky to Collagen (and assigned to the Company effective January 1, 1998)
subject to certain conditions. (See Note 1 of Notes to Consolidated Financial
Statements.) Such indebtedness was fully reserved during fiscal 1997. The
increase in fiscal 1997 spending was also attributed to legal expenses incurred
in connection with a lawsuit with Matrix. In May 1997, Collagen settled its
lawsuit with Matrix, which had been pending since December 1994. The lawsuit
involved Collagen's claims of trade secret misappropriation against Matrix and
two former Collagen employees hired by Matrix in 1992, as well as
cross-complaints against Collagen by Matrix and the two employees for defamation
and violation of state unfair competition law. Collagen granted Matrix a
nonexclusive license to certain intellectual property (which was transferred to
the Company effective January 1, 1998) for certain nonmonetary consideration.
The lawsuit was settled and dismissed with prejudice. All claims by and against
all parties have been released. G&A expenses are expected to remain relatively
constant in fiscal 1998 due to reductions in costs associated with the
Distribution, and
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expenses associated with Mr. Palefsky, offset by anticipated increased expenses
associated with operating as a public company.
The charge for purchased in-process R&D of $3.0 million in fiscal 1996
related to the increase in ownership in Cohesion Corporation from approximately
40% to 81%.
Gains on sales of investments were $5.1 million, $82.1 million and $24.5
million in fiscal 1995, 1996 and 1997, respectively. In fiscal 1995, the Company
sold 245,000 shares of common stock of Target and recorded a net pre-tax gain on
investments of $5.1 million (after the recording of a $925,000 reduction in the
carrying value of certain equity investments due to a decline in value
determined to be other than temporary.) In fiscal 1996, the Company recorded a
net pre-tax gain on investments of $82.1 million (after the recording of a $4.0
million reduction in the carrying value of certain equity investments due to a
decline in value determined to be other than temporary), resulting primarily
from the sale of 1,792,000 shares of Target common stock. In fiscal 1997, the
Company's net pre-tax gain on investments of $24.5 million, primarily resulted
from the sale of 330,000 shares of Target common stock and the sale of the
Company's holdings in Prograft Medical, Inc. ("Prograft") to W.L. Gore and
Associates, Inc.
Equity in earnings of Target were $1.4 million in fiscal 1996 compared to
$2.4 million in fiscal 1995. Equity in Target's earnings decreased in fiscal
1996 over fiscal 1995 due to Collagen's ownership percentage falling from
approximately 29% at June 30, 1995 to approximately 11% in June 30, 1996. In
December 1995, when Collagen's ownership interest fell below 20%, Collagen
changed from the equity to the cost method of accounting for its investment in
Target.
Equity in losses of other affiliate companies were $1.2 million, $1.8
million and $813,000 for fiscal 1995, 1996 and 1997, respectively. Equity losses
in other affiliate companies increased in fiscal 1996 over fiscal 1995 due to
higher Cohesion Corporation losses. The decrease in equity losses in fiscal 1997
was due to the elimination of equity losses from Cohesion Corporation as a
result of Collagen increasing its ownership percentage to 81% in May 1996 and
such losses being consolidated thereafter.
Interest income was $25,000, $378,000 and $566,000 in fiscal 1995, 1996 and
1997, respectively. The increases were due primarily to higher average cash,
cash equivalent, and short-term investment balances and higher interest rates.
Interest expense was $2.1 million, $2.5 million, and $377,000 in fiscal
1995, 1996 and 1997, respectively. Interest expense in fiscal 1995 represents
interest on parent company borrowings. Interest expense in fiscal 1996 related
primarily to borrowings under Collagen's $15.0 million revolving credit
facility, which was paid in full and canceled in June 1997, and interest on
parent company borrowings. Interest expense in fiscal 1997 related only to
borrowings under Collagen's $15.0 million revolving credit facility. The
revolving line of credit was allocated to the Company because the credit
facility was secured by shares of Target Common Stock, which were also allocated
to the Company.
The Company recorded an income tax provision of $0.6 million for fiscal
1995 on a pretax loss of $0.3 million. The provision for income taxes relates
primarily to equity losses in affiliates which are not deductible for tax
purposes. The Company's effective income tax rate was approximately 42% for
fiscal 1997 compared to 45% for fiscal 1996. The higher effective tax rate in
fiscal 1996 primarily was due to the impact of non-deductible items such as
equity losses in affiliates and in-process research and development charges
related to the increase in ownership of Cohesion Corporation.
LIQUIDITY AND CAPITAL RESOURCES
On January 1, 1998, Collagen contributed to the Company, cash, cash
equivalents and short-term investments of $1.8 million, certain equity
investments, including Boston Scientific common stock and Innovasive common
stock, as well as the agreement with Zimmer regarding the distribution of
Collagraft. The Company expects to rely upon proceeds from the sale of these
investments, as well as revenues from the sale of Collagraft, for future working
capital, capital expenditures and other corporate purposes. The Company had a
$5.0 million loan outstanding on a $15.0 million revolving credit facility
during fiscal 1996 and 1997, however, the balance was paid in full and canceled
in June 1997.
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For the nine months ended March 31, 1998, cash provided by investing
activities of $3.8 million primarily related to proceeds of $14.7 million (net
of taxes paid) from the sale of 247,340 shares of common stock of Boston
Scientific and proceeds of approximately $704,000 from the sale of shares in
affiliates, partially offset by the acquisition of substantially all of the
remaining outstanding shares of Cohesion Corporation totaling $10.5 million and
capital expenditures and investments in and loans to affiliates of $1.2 million.
Subsequent to March 31, 1998 and through June 18, 1998, the Company sold 85,000
shares of Boston Scientific stock which provided cash proceeds of $5.7 million.
At June 30, 1997, cash, cash equivalents and short-term investments were
$13.8 million compared to $11.1 million at June 30, 1996. Net cash used in
operating activities was $6.5 million and $6.1 million for fiscal 1996 and
fiscal 1997, respectively.
For fiscal 1997, the $6.1 million used in operating activities was mainly
attributable to a $7.3 million net loss after adjusting for depreciation and
amortization expense, equity in losses of affiliate companies, and gain on
investments (net of taxes paid), partially offset by a $1.6 million decrease in
receivables primarily related to the sales of Target common stock. The principal
sources of cash for investing and financing activities in fiscal 1997 were the
proceeds of $5.6 million (net of taxes paid) from the sale of 330,000 shares of
Target common stock and proceeds of $9.8 million from the sale of holdings in
Prograft, partially offset by the repayment of the line of credit of
approximately $5.0 million and capital and intangible asset expenditures and
additional investments in and loans to affiliates of approximately $1.6 million.
The Company anticipates capital expenditures, equity investments in, and loans
to affiliate companies to be approximately $4.0 million in fiscal 1998.
The Company's principal sources of liquidity include sales of Boston
Scientific common stock, and its cash, cash equivalents and short-term
investments. During fiscal 1995, 1996 and 1997, the Company sold an aggregate of
3,312,500 shares of Target common stock (adjusted for a two-for-one stock split)
for an aggregate pre-tax gain of approximately $101.1 million ($116.6 million
proceeds less cost basis of $15.5 million). As a result of the acquisition of
Target by Boston Scientific in April 1997, Collagen received approximately
1,365,200 shares of Boston Scientific common stock in exchange for Collagen's
1,275,888 shares of Target common stock. The Company anticipates that stock
sales will be made from time to time, with the objective of generating cash for,
among other things, further investments in both current and new affiliate
companies. The Company may defer further sales of Boston Scientific common stock
during fiscal 1998 for tax planning purposes, although decisions concerning
prospective Boston Scientific common stock sales will also be affected by the
then-current market price of Boston Scientific common stock. As another source
of financing, the Company may in the near term establish a credit facility,
although there can be no assurance that a line of credit will be available to
the Company on acceptable terms, if at all.
The Company's capital requirements will depend on numerous factors,
including the progress of the Company's clinical research and product
development programs, the extent to which the Company enters into collaborative
relationships with third parties and the scope of the Company's obligations in
such relationships, the receipt of, and the time required to obtain, regulatory
clearances and approvals, the resources required to protect the Company's
intellectual property and other factors. The timing and amount of such capital
requirements cannot be accurately predicted.
The Company believes that its current sources of liquidity should be
adequate to fund its anticipated capital requirements through at least the next
two years. However, during this period and thereafter, the Company may require
additional financing. The Company does not anticipate significant capital
expenditures in the near term, however, it may make investments in businesses
and technologies that are necessary to support its objectives. There can be no
assurance that additional financing will be available to the Company on
acceptable terms, if at all.
INVESTMENTS, ACQUISITIONS AND LICENSING AGREEMENTS
Collagen increased its ownership position in Cohesion Corporation from
approximately 40% to 81% in May 1996 and from 81% to approximately 99% in
December 1997. In connection with Collagen's May 1996 and December 1997
investments and purchases of Cohesion Corporation shares, substantially all of
the $3.0 million and $10.5 million purchase prices, respectively, were allocated
to in-process research and development, which was expensed at the time of the
purchases. The $10.5 million December 1997 purchase
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price includes cash compensation amounts of approximately $3.8 million
associated with the purchase of certain vested employee stock options.
The Company determined the amounts to be allocated to in-process technology
for Cohesion Corporation based on whether technological feasibility had been
achieved and whether there was any alternative future use for the technology.
The Company concluded that the in-process technology had no alternative future
use after taking into consideration the potential for both usage of the
technology in different products and for resale of the technology. Such studies
are still preliminary and are subject to revision. The products and programs
related to the in-process technology acquired are currently in the clinical
trial and pre-clinical trial stages, respectively. The Company expects to spend
substantial amounts over the next several years to complete the trials and
obtain approval from various regulatory agencies.
Seeking to capitalize on technical success in expressing recombinant
collagen in mouse milk, in February 1996, Collagen made an additional equity
investment of approximately $4.5 million in Pharming B.V. of The Netherlands
("Pharming"), which brought Collagen's ownership percentage in Pharming to
approximately 12%. At March 31, 1998 Collagen's ownership position in Pharming
was approximately 10%, which included an additional $500,000 invested during the
quarter ended December 31, 1997. In connection with the Distribution, and
pursuant to the Intercompany Agreements, the Pharming ownership position was
transferred to the Company, effective January 1, 1998. Pharming is dedicated to
the development and worldwide commercialization of human health care products
produced in transgenic animals. The Company and Pharming will attempt to produce
collagen in the milk of transgenic cattle.
In October 1995, Collagen purchased approximately 844,000 shares of common
stock, representing approximately 9% of the outstanding capital stock of
Innovasive for $4.1 million and entered into a collaborative product development
agreement. Innovasive develops, manufactures and markets tissue and bone
reattachment systems that are particularly relevant to the sports medicine and
arthroscopy segments of the orthopedic surgery market. The Company, pursuant to
the Intercompany Agreements, assumed Collagen's relationship and obligations
with Innovasive. The Company and Innovasive are collaborating to develop certain
resorbable mechanical tissue-fixation devices utilizing collagen-based
biomaterials for applications in orthopedic tissue repairs. The Company is
performing development activities in accordance with a project plan and
Innovasive is reimbursing the Company for such activities in accordance with the
project budget. Accordingly, over the next several years, the collaboration will
require the Company's expertise with collagen-based biomaterials and a small
percentage of the Company's R&D expenditures. In the event that marketable
products are developed as a result of this collaboration, the Company will have
the right but not the obligation to manufacture such products.
In June 1997, the Company sold its 21% investment in Prograft, a privately
held affiliate, to W.L. Gore and Associates, Inc. and recorded a pre-tax gain of
$15.4 million. Prograft was formed in July 1993 by Collagen, Target and Celtrix
Pharmaceuticals, Inc. to develop vascular prostheses, including stents, grafts,
and stent-grafts for the treatment of diseased and damaged blood vessels.
YEAR 2000
Under the Services Agreement, the Company will use Collagen's computer
systems until June 30, 1999. Subsequent to June 30, 1999, the Company may extend
the terms of the Services Agreement or elect to purchase its own computer
systems. Some of Collagen's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar business activity. Collagen has completed and assessment and will
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company will incur no costs related to ensuring that Collagen's computer systems
are year 2000 compliant. If the Company elects to purchase its own computer
systems, the Company will ensure that these are fully functional in the year
2000 as part of the system selection process. Accordingly, the Company estimates
that its costs associated with the year 2000 issue are immaterial.
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BUSINESS
OVERVIEW
The Company is focused on developing and commercializing proprietary
surgical products, including bioresorbable hemostatic devices and biosealants
for tissue repair and regeneration, which increase the effectiveness of and
minimize complications following open and minimally invasive surgeries.
CoStasis(TM) atraumatic hemostat ("CoStasis"), the Company's lead hemostatic
product candidate, designed for use initially in cardiothoracic indications, is
currently in a multi-site, randomized, pivotal clinical trial in Europe. In
1998, the Company expects to complete the trial and file for CE Mark. The
Company has received an Investigational Device Exemption (an "IDE") from the
United States Food and Drug Administration (the "FDA") and has commenced U.S.
pivotal trials of CoStasis, targeting cardiac, hepatic, orthopedic and general
surgery indications. CoSeal(TM) surgical sealant ("CoSeal"), the Company's lead
biosealant product candidate designed for sealing organs and other tissues
resulting from surgical wounds and incisions, is expected to commence European
clinical trials by the end of 1998. Industry experts estimate that the potential
worldwide market for fibrin sealants and surgical adhesives is $850 million
annually. Industry analysts also estimate that the potential surgical sealant
marketplace is $650 million annually. The Company believes its surgical products
will provide several distinct advantages over currently available technologies,
including ease of preparation and use, novel delivery systems, improved safety
profiles and clinical effectiveness. The Company also sells Collagraft(R)
implant ("Collagraft"), an orthopedic product, and has research and development
programs in other orthopedic areas and in recombinant human collagen and
thrombin. The Company's products and programs are based on a platform of
proprietary technologies centered around collagen and hydrophilic polymers that
quickly polymerize in vivo and bind to tissue.
BACKGROUND
The market for wound treatment includes two significant segments:
hemostatic products, used to control bleeding, and surgical sealants, used to
seal organs and tissues compromised by surgery or other trauma. The Company
estimates that there are approximately 9.3 million cardiovascular, hepatic,
orthopedic and general surgeries performed each year in the United States during
which hemostatic products may be used, and approximately 1.4 million such
surgeries performed each year in the United States in which sealant products may
be used. During most surgical procedures, which entail damage to the vasculature
and the compromise of normal tissue barriers, bleeding is inevitable, but the
degree to which bleeding constitutes a threat to the well-being of the patient
depends on the degree of intervention and the tissues involved. The ability to
control bleeding and the subsequent repair of tissues and systems containing
fluids, such as the vasculature, heart, bladder and bowel, however, are
essential, as the consequences of uncontrolled bleeding and fluid leakage can be
catastrophic. In a typical cardiovascular surgical procedure, for example, the
surgeon first attempts to control bleeding from major blood vessels, and the
attendant pulsating blood loss, by tying off or cauterizing the vessels.
However, it is typically more difficult to control diffuse bleeding from
multiple veins and capillaries, which are too numerous to close individually.
This diffuse bleeding is time-consuming to control with currently available
products and limits the surgeon's ability to close the patient at the end of a
procedure. Surgeons must also close wounds created by the trauma of surgery and
seal the surgical site to prevent the leakage of fluids, air or waste. Effective
sealing of organs and tissue during surgery is a critical factor in the ultimate
success of a surgical procedure. Ineffective sealing can result in
life-threatening complications such as blood loss and leakage of air or waste,
higher levels of pain, prolonged hospitalization and a higher mortality rate. As
a result of these considerations, surgeons have increasingly sought improved
technologies for both bleeding control and wound closure.
EXISTING PRODUCTS FOR BLEEDING CONTROL
Currently, surgeons have a variety of tools to stop bleeding (hemostasis)
during surgery. To treat bleeding, surgeons have traditionally identified large
bleeding vessels, accessed them and tied them off to stop bleeding. Recently,
this technique has been supplemented by the use of heat-induced coagulation
using cauterization or lasers. In the absence of excessive damage to the
vascular system, these techniques are usually
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effective in addressing the surgical problems associated with such bleeding. To
treat diffuse capillary bleeding, however, surgeons have limited alternatives,
including simply applying pressure at the bleeding site. Pressure alone,
however, is often insufficient to achieve hemostasis and the surgeon typically
uses additional devices to assist in the application of pressure to the bleeding
tissue.
Traditional Hemostatic Products. Traditional hemostatic products include
powders, sponges and bone wax; however, each of these products has inherent
limitations. Sponges and powders composed of oxidized cellulose, bovine collagen
or bovine thrombin represent a first-line approach to controlling bleeding.
Oxidized cellulose sponges or powders are regularly used to control bleeding,
however because these products are solids, they do not readily conform to the
bleeding tissue surface and often require the use of pressure, or tamponade, to
hold them in place until coagulation is achieved. Bovine collagen sponges or
powders contain collagen surface material which assists in the activation of
platelets and contributes to fibrin clot formation, however they too are solid
materials and suffer from the same limitations as oxidized cellulose sponges or
powders. Additionally, both are difficult to use in minimally invasive
procedures, such as laparoscopic and endoscopic surgery. Bovine thrombin has
also been frequently used in the control of bleeding, but with severe
limitations in effectiveness. Bovine thrombin powders must be mixed and prepared
in a multi-step process during surgery to form a solution which, when applied to
the surgical site, is designed to function in the same manner as natural
thrombin by facilitating the formation of a hemostatic fibrin clot. Its utility
as a hemostatic device, however, is severely limited because the bovine thrombin
solution often washes away from the bleeding site as it is applied. Surgeons
often attempt to address this problem by applying the bovine thrombin solution
on a collagen sponge, however this technique suffers from the same limitations
inherent in the use of sponges. Finally, a nonresorbable wax, called bone wax,
is commonly used in certain surgical applications, such as orthopedic or
cardiothorasic surgery, which involves the cutting of bone. Bone wax is
frequently applied to cut bone surfaces to aid in the control of diffuse
bleeding, however it seals the cut bone surfaces, thereby impeding the repair
and regeneration of the bone. In addition, because bone wax is not resorbed by
the body, surgeons often use cauterization to control bleeding, which results in
the destruction of bone and tissue. While the use of hemostatic devices in
surgery is critical, the Company believes that the limited effectiveness of
these traditional devices has generated demand for new approaches and
technologies.
First Generation Fibrin Sealants. In the last few decades, fibrin sealant
technology has been developed and represents a significant, albeit limited, step
in the evolution of hemostatic products. Fibrin sealants are liquid products
composed of blood-derived fibrinogen and thrombin that are mixed and delivered
to the bleeding site, forming a fibrin clot (gel) that adheres to bleeding
surfaces and induces coagulation. The resulting fibrin matrix acts as a
scaffolding to promote tissue repair and regeneration. While the clinical use of
fibrin and thrombin was pioneered at the turn of the century, the widespread use
of fibrinogen and thrombin as a surgical adhesive for hemostasis did not occur
until the 1970s, with the advent of first generation, non-commercial fibrin
sealants otherwise known as "home-brews". Home-brewed fibrin sealants have not
been approved by the FDA and are typically created by surgeons using informal,
disparate techniques and divergent materials. The typical home-brew fibrin
sealant product is composed of bovine thrombin from the pharmacy and fibrinogen
from an autologous (derived from the patient) or homologous (derived from other
donors) source, requiring significant advance preparation, time and effort.
Because home-brewed products are generally not of commercial grade consistency,
their purity and concentration is uneven and their performance and efficacy is
often difficult to predict. Home-brews were used widely until commercial fibrin
sealant products derived from pooled human plasma became available throughout
Europe, Japan and Canada in the 1980s.
Commercial Fibrin Sealants. Commercial fibrin sealants were developed to
standardize the purity and concentration of fibrinogen and thrombin combinations
using pooled blood sources, providing a more consistent and effective product.
While the resultant improved hemostatic performance of these products led to
their adoption in many surgical applications, their usefulness in surgery is
limited. The preparation of fibrin sealants requires multiple mixing steps,
often taking between 15 and 30 minutes. Once prepared, fibrin sealants are used
with delivery systems which routinely occlude and must be discarded during
surgery due to clogging of the fibrin clot in the delivery system or applicator
tip. Even following application to the site, fibrin sealants have limited
utility on certain surfaces, such as bone, due to weak adherence to the tissue
surface, and
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require a relatively bloodless field due to their limited hemostatic capacity.
In addition, there has been concern related to the use of proteins obtained from
pooled blood sources, as a result of the potential to transmit infectious
disease. In 1978, the FDA revoked clearance for commercial fibrinogen
concentrates, an essential element of fibrin sealants, due to reported high
rates of hepatitis infection among patients. These concerns led to the
development of several alternative fibrin sealants, using the patient's own
blood as a source of fibrinogen, which are being marketed and sold outside the
United States. These solutions suffer from a number of significant drawbacks in
that a large amount of the patient's blood is required, the time to prepare the
solution is significant and the limited concentration of fibrinogen results in a
relatively weak adhesive fibrin gel at the treated site.
Sales of fibrin sealants outside the United States are estimated to total
approximately $250 million annually and the FDA has recently granted clearance
for the distribution of the first fibrin sealant product in the United States.
Several fibrin sealant products are currently in development in the United
States and industry experts estimate that annual sales of such products,
assuming regulatory clearance is obtained, will reach $350 million in the United
States by 2001. The number of procedures using fibrin sealants in the year 2001
is projected to be more than 1.5 million, with cardiovascular surgeries
constituting more than 700,000 of such procedures.
Unmet Clinical Need. Currently, the control of diffuse bleeding in surgery
contributes to wasted time in the operating room and increased patient morbidity
and mortality rates. The Company believes that there is an unmet clinical need
for hemostatic devices that are easy to prepare and implement in the operating
room environment and useful in both open and minimally invasive procedures. The
Company believes that ideally, such a device should be liquid-based, provide
intimate contouring to tissue surfaces to more readily stop bleeding,
sufficiently adhesive and elastic to form a fluid-tight barrier to leakage until
the patient's tissue can repair, and be prepared using fibrinogen derived from
the patient's blood in order to address risks inherent in the use of pooled
blood products.
EXISTING PRODUCTS FOR SEALING ANASTOMOSES AND SURGICAL INCISIONS
The wound closure market includes a variety of devices, such as sutures and
staples, fibrin sealants and hydrogels, that are used by the surgeon to prevent
the leakage of fluids, gas and solids by sealing the interface of surgical
grafts and incisions into tissue barriers in the body ("anastomoses"), such as
the vasculature, heart, bladder and bowel. Historically, the most common method
of wound closure has been the use of sutures and/or surgical stapling, both of
which have limited effectiveness in many applications. The ability of the
surgeon to effect a fluid-tight seal using sutures or staples alone, without any
supplemental sealant product, is highly dependent on the skill of the surgeon in
completing fluid-tight suturing at the sites of surgical intervention or trauma.
Sutures and staples not only lack inherent sealing capabilities, but they are
also difficult to place, especially in minimally invasive surgery, and may tear
tissue, increasing the risk of post-surgical complications. Nonetheless, sutures
and staples are the principal products comprising the international wound
closure market, which industry experts estimate is more than $2 billion per
year.
Fibrin Sealants and Hydrogels. A variety of products are used to supplement
sutures and staples to enhance the effectiveness of the surgical closure of
tissue. In addition to their use as hemostatic agents, fibrin sealants are
frequently used as a complement to sutures and staples to facilitate the
completion of a fluid-tight seal. However, fibrin sealants are unable to bind
securely to host tissue and have poor handling qualities, which limits their
utility as a sealant in surgery and as a barrier to fluid loss. Polymer-based
hydrogels are an alternative to fibrin sealants for providing a fluid-tight seal
or barrier at the sites of surgical incisions and anastomoses, and hydrogel
technology has been approved for use in Europe to seal air leaks in lung surgery
and is currently being tested in other fields of use such as cardiovascular
surgery. Although hydrogels are polymerizing liquids which have the ability to
contour readily to the tissue surface, they are unable to covalently cross-link
directly to the tissue surface at the surgical site. Instead, the surgeon must
apply multiple layers of liquid sealant to the surface to be treated and then
apply light to activate a polymerization process which forms an elastic matrix
to seal the surgical site of application. Not only is this process cumbersome,
but it requires time, the necessary equipment for light activation and
sufficient space in the operating field to accommodate the procedure.
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Unmet Clinical Need. The Company believes that there is an unmet clinical
need for a self-polymerizing, liquid sealant product that can effectively
supplement the surgeon's use of sutures or staples, facilitate quicker closure
and assist in reducing the surgical complications from post-operational leakage.
While the flow of the contents of certain body systems is controlled during
surgery, such as through the use of bypass in cardiovascular procedures, these
barriers must be tightly sealed at the conclusion of surgical repair to avoid
significant complications. In order to meet existing clinical needs, the Company
believes that such a product should be easy to prepare and use, effective in a
single application, able to bind tightly to the patient's tissue and devoid of
human blood products or animal proteins.
THE COHESION TECHNOLOGIES SOLUTIONS
CoStasis and CoSeal are self-polymerizing liquid systems designed to be
prepared quickly and easily. CoStasis and CoSeal are designed to be safe,
bioresorbable products, without the risk of transmission of infectious agents,
for use with a variety of delivery systems in repeated applications throughout a
minimally invasive or open surgical procedure. The Company believes, based on
results from its clinical trials, that CoStasis is effective in stopping diffuse
bleeding on all tissue surfaces. CoStasis incorporates collagen, which has
superior hemostatic qualities, thereby enhancing its adhesiveness and
elasticity, enabling the product to bind tightly to a variety of tissue
surfaces, yet remain sufficiently elastic to stay in place, even in bleeding
sites. CoSeal is a completely synthetic hydrogel based on the Company's PEG
polymer technology, which is designed to polymerize at the site of application
and bind tightly by covalently cross-linking directly to the tissue surface. The
Company believes that its CoStasis hemostatic device and CoSeal surgical sealant
represent a major advantage over current products, including:
- Ease of Preparation. CoStasis is designed as an easy to prepare two-part
system which offers significant time advantages over existing products.
The premixed, ready to use collagen/thrombin suspension is supplied in
one syringe and is mixed with autologous plasma from a second syringe at
the time of administration. The Company's proprietary CellPaker(TM)
plasma processing system is designed to enable the patient's own plasma
to be quickly and sterilely separated in the operating room using a small
amount (approximately 20cc) of the patient's blood. Unlike competitive
products, which generally require large amounts of a patient's blood (or
use plasma from a pooled blood source) and have preparation times of up
to 30 minutes, CoStasis is designed to require a small amount of a
patient's blood and have a relatively short preparation time, thereby
permitting the surgeon the flexibility to decide during the procedure
whether or not to administer the product. CoSeal is a synthetic product,
based on the Company's PEG polymer technology, which requires a
relatively short period of time (typically two to four minutes) to
prepare and load into a syringe for use.
- Ease of Use. CoStasis and CoSeal are self-polymerizing liquid systems,
designed to avoid the need for ancillary equipment such as light sources
or heat to be activated and effective. The products are also designed to
be used repeatedly over the length of a surgical procedure and are not
prone to clogging, a limitation of certain current products. Both
CoStasis and CoSeal are being designed to be delivered through a variety
of systems, to avoid clogging, including spray heads, cannulas and
catheters. The Company believes that this will enable their use in a
variety of surgical procedures, including minimally invasive procedures,
that require liquid products with relatively low viscosity.
- Efficacy. CoStasis and CoSeal are designed to be more adherent and
elastic than current products, which the Company believes will enable
them to bind strongly to a variety of tissue surfaces, including bleeding
sites. CoStasis is also being designed for use in a variety of
applications that customarily arise in surgery, including bleeding bone
edges, anastomotic sites and diffuse bleeding organs. CoSeal is designed
to bond strongly and rapidly to the patient's own tissue, covalently
cross-linking directly to the tissue surface to form a secure sealant
matrix over the treated surgical site, preventing leakage of fluids,
solids and gases. As a result, the Company believes that surgeons will be
able to use these products as a replacement for the variety of products
and procedures currently in use for each of these applications.
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- Safety. CoStasis uses the patient's own blood as the source of its
plasma-derived fibrinogen component, eliminating the potential
contamination risks inherent in the use of pooled blood-derived products.
The collagen component of CoStasis is derived from a closed-herd bovine
source, insuring the highest purity of any bovine collagen currently
available and minimizing the potential for allergic reactions. CoSeal is
based on reactive derivatives of PEG, which has a history of safe use in
other medical applications. Because CoSeal is a completely synthetic
product, no human blood products or animal proteins are required.
- Competitive Cost. CoStasis and CoSeal are designed to provide the surgeon
with the flexibility to determine whether to use the product during the
surgical procedure, unlike current products which have lengthy
preparation times and require the surgeon to commit to use of the product
prior to a determination of need, at a cost that the Company believes is
competitive with fibrin sealant products currently on the market.
STRATEGY
The Company's objective is to develop, manufacture and commercialize
innovative tissue repair and regeneration products, with the initial goal of
rapidly exploiting its proprietary technology in the areas of surgical hemostats
and sealants. The Company's strategy consists of the following key elements:
- Initial Focus on Large Markets. The Company is focusing initially on the
commercial development of hemostatic and sealant products for
cardiothoracic and cardiovascular surgery indications. The Company
estimates that there are approximately 9.3 million open and minimally
invasive cardiovascular, hepatic, orthopedic and general surgeries
performed each year in the United States in which hemostatic products may
be used and approximately 1.4 million such surgeries performed each year
in the United States in which sealant products may be used.
- Leverage Product Competitive Advantages. The Company is conducting a
100-patient, multi-center, randomized clinical trial of CoStasis in
Europe, controlled against conventional medical practices, including
fibrin sealants, and expects to differentiate its products through ease
of preparation, novel delivery systems, clinical effectiveness and
safety. CoStasis uses autologous plasma (derived from the patient), as
opposed to homologous plasma (derived from pooled blood sources), thereby
eliminating the potential infectious disease risks inherent in the use of
pooled blood-derived products.
- Targeted Regulatory Classification and Distribution. The Company believes
that CoStasis and CoSeal will be classified as medical devices in Europe
and the United States and as a result will be subject to less onerous,
less costly and shorter regulatory approval processes than if classified
as biological agents or drugs. Initial distribution in Europe is planned
through geographically focused, specialty cardiovascular distributors
with existing customer relationships and established sales
infrastructures. In the United States, the Company plans to target the
concentrated cardiovascular surgery segment with a direct sales force to
maximize operating margins and plans to consider additional distribution
arrangements for other surgical specialties such as general surgery,
gynecology and orthopedics.
- Expand into Other Surgical Markets. The Company believes that its
technology and initial product formulations may also be applied to
additional, non-cardiac, high-volume procedures. The Company is
developing hemostatic and sealant indications in colon-rectal (e.g.,
colon resections), hepatic (e.g., liver transplants) and orthopedic
(e.g., bone grafts) surgeries, including both open and minimally invasive
surgical techniques. The Company believes that its technology platform is
highly scaleable and will enable it to expand into additional markets
over time.
- Capitalize on Intellectual Property Portfolio. The Company believes it
has substantial design, manufacturing and applications engineering
expertise in the development of biomaterials and delivery systems which,
when combined with its intellectual property portfolio, will enable it to
expand into additional markets by cost-effectively addressing unmet
surgical needs for ease of preparation, ease of use, efficacy and safety.
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- Develop and Maintain Close Relationships with Leading Professionals
Worldwide. The Company strives to maintain close relationships with
leading scientists, surgeons and other healthcare professionals worldwide
who are dedicated to expanding the use of biomaterials for hemostatic and
sealant applications. The Company plans to actively assist and support
educational and training programs for and the research efforts of such
professionals.
PRODUCTS AND DEVELOPMENT PROGRAMS
The following table summarizes the status of the Company's products and
development programs:
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
PRIMARY PROGRAM/PRODUCT STATUS(1) PRIMARY APPLICATION
- -------------------------------------------------------------------------------------------------------------------
COSTASIS HEMOSTAT Europe: Pivotal clinical trial Cardiothoracic procedures
ongoing; CE Mark application expected
in 1998
United States: Pivotal clinical trial General, hepatic, orthopedic and
started in April 1998 cardiothoracic procedures
- -------------------------------------------------------------------------------------------------------------------
COSEAL BIOSEALANT Clinical trials planned for second Cardiovascular and vascular
half of 1998 procedures
- -------------------------------------------------------------------------------------------------------------------
ORTHOPEDICS
Collagraft Implant Currently marketed; U.S. and Asian Bone grafting applications
distribution through Zimmer, Inc.
Bone Anchor Clinical trial planned for second Soft tissue fixation to bone
half of 1998
Osteoarthritis Clinical feasibility study completed Pain relief from degenerative joint
in Europe in 1997 disease in bones
- -------------------------------------------------------------------------------------------------------------------
OTHER DEVELOPMENT PROGRAMS
Adhesion Prevention Barriers Preclinical studies General, gynecological, orthopedic
and cardiovascular procedures
Resorbable Sealant for Preclinical studies Percutaneous catheterization
Percutaneous Catheter Access procedures
Sites
Recombinant Human Collagen and Research Replacement for bovine collagen and
Thrombin thrombin
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Indicates product development status. "Preclinical" denotes formulation and
efficacy studies in animal models necessary to support an application to
commence human clinical testing. "Research" includes discovery, research,
development of and subsequent identification of a candidate for preclinical
studies. The regulatory approval process requires successful completion of
many steps before a product is approved for commercialization. See "Risk
Factors -- Government Regulation" and "-- Government Regulation."
COSTASIS HEMOSTATIC AGENT
The Company believes that while surgeons have several devices to control
diffuse bleeding during surgery, none may be prepared as quickly and easily, or
work as rapidly and effectively as is needed. While traditional sponges and
powders are effective hemostatic agents, such devices are solids, and are
therefore unable to flow over tissue surfaces and into bleeding crevices. In
addition, sponges and powders tend to move away from the bleeding site without
application of pressure by the surgeon. Fibrin sealants overcome some of these
limitations, however they are cumbersome to prepare and use and adhere poorly to
bleeding surfaces. Significant concerns regarding the safety of blood-derived
products have also limited the adoption of commercial fibrin sealants in the
United States and other markets. The Company believes there is a clinical
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need for a surgical product which can be easily prepared and used in the
operating room to provide rapid and effective treatment of diffuse capillary
bleeding on a spectrum of tissue surfaces.
CoStasis Agent
CoStasis Delivery System
CoStasis is an atraumatic liquid hemostat designed for use in surgical
procedures to control bleeding from capillaries and small veins. Composed of a
sterile suspension of bovine fibrillar collagen and bovine thrombin in calcium
chloride, CoStasis is applied to the bleeding site with the patient's plasma,
incorporating the surgical advantages of collagen, fibrinogen and thrombin. The
pre-mixed, ready-to-use collagen/thrombin suspension is supplied in one syringe
and is mixed with the patient's own plasma from a second syringe at the time of
administration to the bleeding site. The patient's plasma provides the source of
fibrinogen that is cleaved by the thrombin to form a collagen-reinforced fibrin
clot, which is hemostatic and adherent to the bleeding tissue.
The collagen component of CoStasis is derived from Collagen's closed herd
cows, a source available to none of the Company's competitors. The thrombin
component is obtained from commercial sources, and is processed to a high level
of purity. The use of these components minimizes the possibility of allergic
reactions associated with lower-purity bovine collagen or thrombin used in other
products. In addition, both components come from manufacturing processes which
eliminate viruses, providing a further margin of safety. The pre-mixed nature of
the collagen/thrombin components reduces preparation time compared to
lyophilized commercial fibrin sealants, which must be reconstituted before use,
and when compared to other agents, which have complex preparation requirements.
In addition, the Company has developed a patented system, called the
CellPaker, which is designed to quickly and sterilely separate the patient's
blood into plasma in the operating room for use in conjunction with CoStasis.
The CellPaker is a single use device, which the Company plans to package
separately from CoStasis, and which the Company believes will make it easy to
obtain the patient's plasma upon entry into surgery. Unlike competitive
products, which generally require a large amount of a patient's blood (or plasma
from a pooled blood source) and have lengthy preparation times, CoStasis is
designed to require a small amount of a patient's blood and have a relatively
short preparation time (less than 10 minutes).
CellPaker Device
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CellPaker System
When applied to a bleeding surface, the CoStasis/plasma composite is
designed to rapidly form a collagen/fibrin matrix which conforms to the tissue
surface and is able to enter surface cracks and crevices. The hemostatic
capacity of the collagen/fibrin gel is a combination of the effects of collagen,
fibrin and thrombin in activation of the coagulation cascades and in presenting
a physical barrier which exerts pressure on the site to stem blood flow.
Preclinical studies have demonstrated that CoStasis acts significantly faster
than traditional hemostatic sponges and commercial fibrin sealants in the
control of bleeding from a variety of bleeding tissue sites. CoStasis also
proved effective in controlling bleeding in animal models in which coagulation
was compromised using heparin or aspirin. The Company believes that these
preclinical data indicate that CoStasis has the potential to be highly effective
in the rapid control of diffuse bleeding from capillaries, venules, and
arterioles under diverse conditions modeling clinical use and tissue conditions.
CoStasis has been used to control bleeding in several surgical indications
in clinical trials in the United States and Europe. In March 1997, the Company
received an IDE from the FDA to test CoStasis in feasibility studies in the
control of bleeding at split thickness skin graft donor sites in nine patients
who were undergoing skin grafting due to burns or tissue reconstruction
procedures. CoStasis was effective in the control of bleeding and no adverse
sequelae were reported with its use. Subsequently, in the latter half of 1997,
CoStasis was used in a European feasibility study in 13 subjects undergoing
coronary artery bypass surgery ("CABG"). In this study, CoStasis controlled
bleeding at the sites of grafted vessels joining vessels of the heart
(anastomoses) and the bleeding surface of the heart and chest wall. In January
1998, the Company began a multi-center, randomized, controlled, pivotal clinical
trial of CoStasis in Europe for the control of bleeding in approximately 100
CABG surgery patients. This study is expected to be completed and a CE Mark
dossier is expected to be filed by the end of 1998. The Company has received an
IDE from the FDA to expand clinical trials in the United States in the fields of
cardiothoracic, orthopedic, general and hepatic surgery. These trials were
initiated in April 1998 and are expected to be completed by the end of 1998. The
Company expects to use the data available from these studies in Europe and the
United States to support worldwide submissions for approval to market CoStasis.
CoStasis contains thrombin, which is a FDA-licensed biological drug.
Consequently, the FDA considers CoStasis to be a combination product subject to
jurisdiction by the Center for Biologics Evaluation and Research ("CBER") and
the Center for Devices and Radiological Health ("CDRH"). The FDA has assigned
lead review responsibility to CDRH following a "Request for Designation"
determination by the FDA in September 1996. The Company believes that this
decision was significant, as fibrin sealants containing human plasma are
regulated as biological drugs, which may substantially increase the duration and
complexity of their regulatory approval processes compared to that of CoStasis.
COSEAL BIOSEALANT
Surgical repair necessitates the opening or puncturing of body cavities and
the compromise of barriers that normally prevent fluid, solids and gas leakage
in the body. This leakage ranges from a minor inconvenience to a
life-threatening event and is especially burdensome in cardiothoracic,
cardiovascular and abdominal surgery procedures. Currently, the surgeon is
dependent on meticulous use of surgical staples and sutures to create a fluid-
or gas-tight seal when repairing these tissues. In some cases, "home-brew" or
commercial fibrin sealants are used to assist in achieving a dependable seal.
While polymer-based hydrogels are an alternative to fibrin sealants, they are
unable to covalently cross-link directly to the tissue surface at the surgical
site and often require cumbersome processes, including light or energy
activation, in order to seal the surgical site of application. The Company
therefore believes that the ideal product is dependable, effective and easy to
prepare and apply to seal surgical sites in all patients, enabling the surgeon
to complete surgery more quickly, knowing that the patient would not suffer
adverse consequences due to subsequent post-surgical leakage. The Company
believes that there is a significant clinical demand in many surgical
applications for biosealants that prevent leakage of fluids, solids or gases
from the surgical or trauma site.
The Company's CoSeal biosealant uses two biocompatible liquids which
polymerize in seconds at the site of application without the need for activating
equipment and are absorbed by the body within weeks after the
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tissue has repaired. CoSeal is based on reactive derivatives of polyethylene
glycol, which has a history of safe use in other medical applications. These
PEG-polymers are liquids of low viscosity and flow readily across the surfaces
to be sealed. In seconds, they covalently cross-link with the patient's tissue
over the treated surgical site to form a tightly bound matrix with excellent
elasticity and strength. CoSeal is based on a completely synthetic, PEG-polymer
platform technology, which avoids the need for any blood products or animal
proteins, addressing concerns about transmission of infectious agents.
Some existing products and products in development use light- or
energy-activated polymers that require significant additional equipment in the
surgical field and are difficult to use in minimally invasive surgery. CoSeal is
a self-polymerizing device which does not require activating equipment. In
consultation with its clinical advisers, the Company is also developing a
variety of special delivery devices. These delivery devices complement the
designed flexibility in CoSeal, giving surgeons a variety of tools for diverse
applications.
CoSeal has demonstrated ease of use and clinical effectiveness in sealing
surgical sites in cardiovascular grafting procedures in animal models. Once
CoSeal was applied, vascular grafts did not leak at anastomoses or puncture
sites when treated. The Company expects to begin clinical trials of CoSeal in
cardiovascular surgery procedures in the second half of 1998 and to file a CE
Mark dossier for cardiovascular sealing indications in 1999.
ORTHOPEDICS
The Company is currently marketing Collagraft, its proprietary bone graft
substitute, through its partner Zimmer, and is developing a number of additional
collagen-based biomaterials for use in a variety of orthopedic indications
pursuant to a product development and distribution agreement between Collagen
and Zimmer, which was assigned to the Company in connection with the
Intercompany Agreements. Under the terms of such agreement, Collagen has granted
Zimmer exclusive and perpetual distribution rights for Collagraft in certain
specified countries and territories (the "Zimmer Territory") and has agreed to
pay Zimmer a royalty for Collagraft products sold by Collagen over a specified
period. Collagen has sole discretion as to whether and how to market Collagraft
outside of the Zimmer territory and holds a license to use, with the right to
sublicense, Zimmer's Collagraft trademark to market Collagraft outside of the
Zimmer territory and to seek trademark protection of Collagraft in its own name.
Collagen and Zimmer have also agreed under the same agreement to jointly perform
research, development and clinical studies and to obtain regulatory approvals
for Collagraft and other products composed solely of a bovine collagen component
and a HA/TCP (as defined below) component. Collagen is the sole owner of all
inventions, improvements, trade secrets and other proprietary rights and
know-how with respect to any collagen-based or biologically based materials or
biologically active factors used or incorporated in Collagraft and developed
pursuant to the agreement.
Collagraft. The Company's Collagraft implant is a bone graft substitute
which provides a scaffolding around which new bone can grow. A bone graft
substitute eliminates the need for a patient to undergo a painful autograft bone
grafting procedure, which involves harvesting the patient's own bone from
another site, and prevents the transmission of human infectious agents and
inconsistent results from allograft procedures where bone graft supplied through
a bone bank is used. The Company's Collagraft paste and Collagraft strip
products, when used with a patient's own bone marrow, are indicated for use in
acute long bone fractures and traumatic bone defects to provide a matrix for the
repair process of bone. The Collagraft products are a mixture of purified
fibrillar collagen and hydroxyapatite/tricalcium phosphate ceramic ("HA/TCP")
and are supplied sterile in both strip (premixed) and ready-to-mix form.
Hydroxyapatite is a biocompatible substance that is minimally reabsorbed.
Tricalcium phosphate is radiopaque, biocompatible and biodegradable. Its
degradation products can be reconstituted by the body to form new bone mineral,
allowing for bone deposition.
Bone Anchors. Bone anchors are used to anchor soft tissue to bone. The
Company is in the process of developing a bone anchor product with Innovasive
pursuant to a research and development agreement. Under the terms of such
agreement, the parties have agreed to jointly develop fully or partially
resorbable mechanical meniscal repair devices and mechanical tissue-to-bone
fixation devices and the rights, title and interest in any technology jointly
developed are jointly owned. The parties have agreed that until October 2000,
neither party will develop or commence the development of any such products
independently, or in collaboration with, or
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<PAGE> 50
purchase any such products from, any third party. Under a related distribution
agreement, Innovasive holds exclusive marketing rights to such product. The FDA
has approved an IDE to initiate clinical trials of the Company's bone anchor
product. The Company expects to commence these trials in the second half of
1998.
Osteoarthritis. Osteoarthritis, also known as degenerative joint disease,
is the most prevalent form of arthritis in the United States. The Centers for
Disease Control and Prevention estimated in 1990 that seven million people in
the United States suffered significant limitations in their daily activities due
to the effects of osteoarthritis. A European feasibility study involving 30
patients was conducted by the Company in 1997 and significant pain reduction was
obtained with a single injection of collagen into the joint space. The Company
expects to conduct additional clinical trials in 1998.
OTHER PRODUCT DEVELOPMENT PROGRAMS
Adhesion Prevention Barriers. The Company is also developing CoStop, an
adhesion-prevention barrier, based on the Company's proprietary PEG-polymer
technology. Adhesion-prevention barriers are used to prevent the formation of
debilitating or painful internal tissue adhesions (or scars) after surgery. The
few products currently on the market suffer serious shortcomings, including low
efficacy, high cost, difficult handling, and ineffectiveness in the presence of
blood. The Company believes CoStop, with its PEG-polymer technology, will offer
superior efficacy, greater ease-of-use and lower cost, relative to products on
the market or known to be under development.
Resorbable Sealant for Percutaneous Access Sites. The Company is
researching the use of its hemostatic and biosealant technology for sealing
sites for percutaneous catheter-based femoral artery cardiovascular procedures.
It is estimated that approximately 2.1 million diagnostic and therapeutic
catheter-based procedures are performed worldwide each year, in applications
including coronary angiography and percutaneous transluminal coronary
angioplasty. Research studies in canine models have indicated that both the
CoStasis and CoSeal technologies can achieve effective, rapid hemostasis in the
sealing of these access sites.
Recombinant Human Collagen and Thrombin. The Company's recombinant program
is focused on the development of recombinant human collagen and thrombin through
transgenic animals and yeast. The Company's objective is to obtain commercially
significant quantities of recombinant human type I collagen and thrombin to
serve as an alternative to bovine collagen and thrombin in its products. The
Company believes that by doing this, it will be able to develop a wider range of
innovative surgical products for tissue repair and regeneration. The Company has
made an equity investment in and is actively collaborating with Pharming, B.V.
of the Netherlands for the purpose of developing recombinant human collagen
through transgenic animals. In addition, the Company has a collaborative
agreement with Genotypes, Inc. of South San Francisco, California, to develop
recombinant human collagen through yeast. The Company is working with Genzyme
Transgenics, Inc. to produce human thrombin through transgenic animals.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are directed at achieving
continuing improvements in surgical products to achieve hemostasis, tissue
sealing and adhesion prevention. It has identified opportunities in using only
synthetic agents and recombinant proteins in product configurations and in
achieving superior sealant properties with advanced hemostatic potential at the
surgical site. In addition, future product development will utilize the
Company's proprietary technology platforms in the generation of tissue
engineering products for tissue repair, regeneration and replacement. Research
and development expenses for the years ended June 30, 1995, 1996, 1997 and for
the nine months ended March 31, 1998 were $3.4 million, $4.3 million, $9.6
million and $11.3 million, respectively ($8.3 million and $10.3 million for the
year ended June 30, 1997 and the nine months ended March 31, 1998, respectively,
on a pro forma basis reflecting reimbursements from Collagen under the Research
and Development Agreement.)
MANUFACTURING
The Company anticipates that it will manufacture and package its final
products and that it will use outside contractors for other functions such as
non-proprietary, high volume processes. The Company has
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approximately 12,000 square feet of manufacturing space in Palo Alto,
California. There can be no assurance that the Company will be able to attract,
train and retain the required personnel or will be able to increase its
manufacturing capability to manufacture commercial quantities of its planned
products in a timely manner, or at all. Manufacturers often encounter
difficulties in scaling up production of their products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel, and the Company may encounter similar
problems. The Company can make no assurance that its manufacturing scale-up
efforts will be successful or that high-volume manufacturing, if needed, can be
established or maintained at commercially reasonable costs on a timely basis, if
at all. Any of these factors could have an material adverse effect on the
Company's ability to develop and commercialize its products, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Intense Competition" and
"Limited Manufacturing Capacity."
The Company purchases raw materials used in its products from various
suppliers. For example, the Company purchases all of its requirements for
collagen materials from Collagen, pursuant to the terms of the Intercompany
Agreements. These materials have generally been readily available in the
marketplace and have not been the subject of shortages. There can, however, be
no assurance that the Company or its suppliers or contract manufacturers will
not experience materials shortages in the future. The source of the collagen
supplied by Collagen is bovine dermis. Collagen uses a patented viral
inactivation process for its collagen-based products to promote both safety and
quality. Since 1987, Collagen has sourced the bovine dermis from a "closed herd"
of cattle in an effort to prevent diseases, such as BSE, from contaminating its
collagen-based products. Maintaining a closed herd requires the physical
separation of the herd from other herds, the tracking of the lineage of each
animal and the maintenance of each animal under a veterinary program. In the
event of any material diminution in the size of the herd for any reason,
including accident or disease, Collagen would have a limited ability to quickly
increase supply of acceptable cattle. Any such diminution would have a material
adverse effect on the Company's ability to sell bovine collagen-based products
and, as a result, the Company's business, financial condition and results of
operations would be materially and adversely affected. Under the Company's
product development and distribution agreement with Zimmer, the Company is
required to purchase HA/TCP (hydroxyapatite/tricalcium phosphate) solely from
Zimmer for the manufacture of the Collagraft implant; provided, however, the
Company is released from such obligation if Zimmer is unable to meet certain
product specifications, Zimmer fails to supply the Company with a certain
percentage of its requirements for three consecutive months or an alternative
supplier becomes available at competitive prices which Zimmer is unwilling to
match. Any such future shortages of materials or components could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company, as well as any third-party manufacturers of its products, will
be subject to inspections by the FDA for compliance with applicable GMP and QSR
requirements, which include requirements relating to manufacturing conditions,
extensive testing, control documentation and other quality assurance procedures.
The facilities the Company uses have undergone an ISO inspection in preparation
for obtaining a CE Mark on its products. Despite these efforts, the Company can
make no assurance as to its ability to obtain all necessary FDA inspections of
its facility in a timely fashion, if at all. See " -- Government Regulation."
SALES, MARKETING AND DISTRIBUTION
The Company's planned core marketing, sales and distribution strategy
includes using a combination of a direct sales force and distributors. Initial
distribution in Europe is planned through geographically-focused, specialty
cardiovascular distributors with existing customer relationships and established
sales infrastructures. In the United States, the Company plans to target the
concentrated cardiovascular surgery segment with a direct sales force in an
effort to maximize operating margins and to consider additional distribution
arrangements for other surgical specialties, such as general surgery,
neurosurgery and orthopedics; however it can make no assurance as to the
effectiveness of such strategy. The Company's sales, marketing and distribution
plans will be dependent in part on the Company's ability to enter into
successful strategic relationships and hire, train and retain specialized
personnel. There can be no assurance that the Company will be able to secure
such strategic relationships or hire, train or retain specialized personnel on
terms that are attractive and acceptable to the Company, if at all.
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While sales of Collagraft bone graft products to Zimmer in fiscal years
1995, 1996, 1997 and in the nine months ended March 31, 1997 and 1998 totaled
$3.0 million, $3.1 million, 1.9 million, $1.6 million and $7.1 million,
respectively, the Company can make no assurance regarding future sales levels.
Collagraft bone graft products are marketed in the United States and Asia. The
Company holds marketing rights for Collagraft bone graft products in Europe,
Canada, Africa and the Middle East. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and " -- Government Regulation."
COMPETITION
The Company anticipates that it will compete with many domestic and foreign
medical device, pharmaceutical and biopharmaceutical companies and organizations
across each of its product categories and areas in which it is conducting
research and development activities. Many of these companies and organizations
have or will have substantially greater financial, technological, research and
development, regulatory and clinical, marketing, sales and personnel resources
than the Company. The Company's competitors may develop alternative technologies
and products that are more effective, easier to use or more economical than
those which have been or are being developed by the Company or that render the
Company's technology and products obsolete and non-competitive. Certain of these
competitors may obtain approval or clearance by the FDA or foreign regulatory
approval, patent protection, and achieve product commercialization earlier than
the Company. Any of these factors could have a material, adverse effect on the
Company's financial condition and results of operations. There can be no
assurance that any marketing or other strategic partners that the Company may
engage will not pursue parallel development of technologies or products relating
to or competitive with the Company's planned product portfolio. In general,
other recently developed technologies or procedures are, or may in the future
be, the basis for competitive products.
Hemostatic and Biosealant Devices. In the hemostatic and biosealant areas,
the Company believes in the United States it will face strong competition from
existing methodologies for controlling bleeding and sealing wounds resulting
from surgery, such as hemostatic powders and sponges, as well as from
collagen-based hemostats and traditional sutures and staples marketed by
companies such as Johnson & Johnson, United States Surgical Corporation and
American Home Products Corporation. In addition, the Company believes that it
will face competition from more recent products and technologies, such as those
developed by Fusion Medical Technologies, Inc. ("Fusion") and Focal, Inc.
("Focal"). Outside of the United States, other competitive products currently
being marketed include fibrin sealants, sold in Europe and the Pacific Rim
countries by Immuno AG and Centeon L.L.C. In addition, in the United States,
there are several fibrin sealants under development, including those by the
American Red Cross, Baxter Healthcare Corporation, Convatec, a subsidiary of
Bristol-Myers Squibb Company, Haemacure Corporation and V.I. Technologies, Inc.
(Vitex). In addition to conventional fibrin sealants, there are a number of
other products in late-stage development using either collagen or polymer
technologies, made by Fusion and Focal, as well as another class of sealants,
cyanoacrylates.
The Company plans to develop a second-generation, non-fibrinogen dependent
biosealant which eliminates the need to collect and process plasma at the time
of surgery due to the Company's PEG polymer technology and which will offer
surgeons strong, easy-to-apply sealing in sensitive open and endoscopic surgery
situations. The Company plans to ultimately seek additional indications in
general surgery, urology and neurology. The Company believes that the
second-generation biosealants it currently has under development will largely
supersede fibrin sealants in adhesive applications and that patch or membrane
products will likely remain niche products compared to liquid and gel
formulations, since patch products are generally more difficult to handle and
apply than a liquid or gel, especially in minimally invasive surgery. Most
second-generation products under development are still in the pre-clinical stage
in the United States and overseas, with the exception of those being developed
by Focal, which is marketing its FocalSeal photoactivated polymer hydrogel
outside of the United States with Ethicon, Inc., a Johnson & Johnson subsidiary.
Orthopedics. Bone graft substitutes currently are used in a small fraction
of bone grafting procedures. The vast majority of bone grafting procedures
currently use autograft (autologous bone) taken from the patient's own body and
allograft (bone from bone banks taken from deceased donors). Collagraft bone
graft products belong to a new family of products called bone graft substitutes.
The most direct competitor to
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Collagraft bone graft products is ProOsteon, a synthetic bone graft substitute
made of a coral-like mineral. A less direct competitor to Collagraft bone graft
products is an allograft bone product called Grafton, which is packaged in a
syringe and marketed and priced like a bone graft substitute. Several companies
and institutions are engaged in the development of collagen-based and other
materials, techniques, procedures and products for use in medical applications
anticipated to be addressed by Collagraft bone graft products.
INTELLECTUAL PROPERTY
Collagen and the Company have entered into an Assignment and License
Agreement, effective January 1, 1998, which, among other things, allocates
Collagen's technology and intellectual property between the Company and
Collagen. Pursuant to the Assignment and License Agreement, substantially all of
Collagen's technology and intellectual property (including patents, copyrights,
trademarks, trade secrets), other than technology relating to the breast implant
technology, has been assigned to the Company, and the Company has granted back
to Collagen an exclusive, worldwide, perpetual, fully-paid license to such
assigned technology and intellectual property that is used solely in the field
of Collagen's business, which consists of the development, manufacture, use,
sale and other commercialization of human aesthetics products, technologies and
treatments, breast implant products and processes, urinary incontinence products
and treatments and ostomy products. The Assignment and License Agreement
provides that each of the Company and Collagen may obtain certain rights to
improvements made by the other company prior to March 15, 2004, inasmuch as such
improvements, if any, are in the applicable party's field of business. In
addition, under the Assignment and License Agreement, each of the Company and
Collagen have covenanted to not compete with each other's business until March
15, 2004.
As of March 15, 1998, the Company's patent portfolio includes 87 active,
issued U.S. patents, 184 issued foreign patents and over 170 U.S. and non-U.S.
patents pending. These patents cover novel compositions of a variety of
biomaterials and uses in various fields of medicine. The patent portfolio has a
strong focus on proprietary technology in the fields of collagen compositions
and hydrophilic polymers used for in situ polymerization. The Company also holds
several registered trademarks in the United States and a number of foreign
countries and pursues the protection of its trademarks and service marks,
whether or not such marks are registered. Notwithstanding these measures, the
Company can make no assurance as to the effectiveness of its efforts and many of
the Company's older patents covering collagen-containing compositions will
expire within the next several years. However, the majority of the Company's
patent portfolio covers biomaterials that are tailored for use in a particular
manner, and these patents will not expire until well into the next decade. In
addition, the Company has a number of more recently issued patents covering
various methods of treatment using specific formulations of biomaterials that
will not expire for 15 or more years.
The Company has filed patent applications covering tissue adhesives,
biosealants, and adhesion prevention agents; however, it can make no assurance
that any such patents will issue, will provide the Company any competitive
advantages or will not be challenged by third parties.
The Company also relies upon trade secret protection for certain unpatented
aspects of its proprietary technology. There can be no assurance that others
will not independently develop or otherwise acquire substantially equivalent
proprietary information or techniques, that others will not otherwise gain
access to its proprietary technology or disclose such technology, or that the
Company can meaningfully protect its trade secrets. The Company requires its
employees and consultants to execute appropriate confidentiality and proprietary
information agreements upon the commencement of an employment or consulting
relationship with it. These agreements generally provide that all confidential
information developed or made known to the individual by the Company during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties, except in specific
circumstances. The agreements also generally provide that all inventions
conceived by the individual in the course of rendering services to the Company
shall be the exclusive property of the Company; however, certain of the
Company's agreements with consultants, who typically are employed on a full-time
basis by academic institutions or hospitals, do not contain assignment of
invention provisions. There can be no assurance that these agreements will
provide meaningful protection or adequate remedies for the Company in the event
of unauthorized use, transfer or disclosure of such information or inventions.
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The Company's success will depend on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
There can be no assurance that the Company's pending or future patent
applications will issue, or that the claims of the Company's issued patents, or
any patents that may issue in the future, will provide any competitive
advantages for the Company's products or that they will not be successfully
challenged, narrowed, invalidated or circumvented in the future. Moreover,
litigation and interference or opposition proceedings associated with obtaining,
enforcing or defending patents or trade secrets is expensive and can divert the
efforts of technical and management personnel. The Company has filed patent
applications in certain foreign countries corresponding to certain patent
applications that it has filed in the United States and may file additional
patent applications inside and outside the United States. The Company believes
that obtaining foreign patents may be more difficult than obtaining domestic
patents because of differences in patent laws and believes the protection
afforded by foreign patents or any other foreign intellectual property
protection, if obtained, may be more limited than that provided domestically. In
addition, there can be no assurance that competitors will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use, offer for sale, sell and import its products. The Company
is aware that certain medical device, pharmaceutical and other companies,
universities and research institutions have filed patent applications or have
issued patents relating to compositions and methods for wound closure and
adhesion prevention. In addition, the medical device and pharmaceutical
industries have been characterized by litigation regarding patents and other
intellectual property rights, and many companies in the medical device industry
have employed intellectual property litigation to gain a competitive advantage.
There can be no assurance that litigation will not be brought against the
Company by third parties in the future challenging the Company's patent rights
or claiming infringement by the Company of patents held by these or other third
parties.
Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the medical products industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. While the Company intends to seek patent
protection for its proprietary technology, products and processes, there can be
no assurance as to the success or timeliness in obtaining any such patents, that
the breadth of claims obtained, if any, will provide adequate protection of the
Company's proprietary technologies, products and processes, or that the Company
will be able to adequately enforce any such claims to protect its proprietary
technology, products and processes. Because patent applications in the United
States are confidential until the patents issue, and publication of discoveries
in the scientific and patent literature tends to lag behind actual discoveries
by several months, the Company cannot be certain that covered by pending patent
applications or that the Company was the first to file patent applications for
such inventions. The Company may desire or may be required to obtain licenses to
patents or proprietary rights of others. No assurance can be given that any
licenses required under any patents or proprietary rights of third parties would
be made available on terms acceptable to the Company, or at all. If the Company
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around of otherwise avoid such
patents, or it could find that the development, manufacture or sale of products
requiring such licenses is foreclosed.
Litigation may be necessary to defend against or assert claims of patent
infringement or invalidity, to enforce or defend patents issued to the Company,
to protect trade secrets or know-how owned by the Company, or to determine the
scope and validity of the proprietary rights of others. In addition,
interference proceedings in the U.S. Patent and Trademark Office, or opposition
proceedings in a foreign patent office, may be necessary to determine the
priority of inventions with respect to patent applications of the Company or its
licensors. Litigation, interference or opposition proceedings could result in
substantial costs to and diversion of effort by the Company, and adverse
determinations in any such proceedings could prevent the Company from
manufacturing, marketing or selling its products and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect,
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in part, by confidentiality agreements with collaborative partners, vendors,
suppliers, employees and consultants. The Company also has invention or patent
assignment agreements with its employees and certain, but not all, commercial
partners and consultants. There can be no assurance that relevant inventions
will not be developed by a person not bound by an invention assignment
agreement. There can be no assurance that binding agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors. See "Risk Factors -- Uncertainties Relating to
Intellectual Property."
GOVERNMENT REGULATION
The Company's existing and proposed products, its research and development
and planned commercialization activities are subject to regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies. The Federal Food, Drug and Cosmetic Act (the "FDC
Act"), as amended, the regulations promulgated thereunder, and other federal and
state statutes and regulations, govern, among other things, the preclinical and
clinical testing, manufacturing conditions, device safety, efficacy, labeling
and storage, record keeping, advertising and the promotion of medical devices
and drugs. Product development and approval within this regulatory framework
take a number of years and involve the expenditure of substantial resources.
Additionally, in order for the Company to market its products in Europe and
other foreign countries, the Company and/or its partners, if any, must obtain
required regulatory approvals and comply with extensive regulations governing
safety, quality and manufacturing processes. These regulations vary
significantly from country to country. The time required to obtain approval to
market the Company's products outside the United States may be longer or shorter
than that required in the United States. In order to market the products being
developed by the Company in the member countries of the European Union, the
Company will be required to obtain CE Mark certification. CE Mark certification
is an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. In the first half
of 1998, the Company completed a successful quality systems audit to the ISO
9001/EN46001 and Medical Devices Directive requirements, which is one of the
principal steps in the CE Mark process. The remainder of the CE Mark process
consists primarily of review by the approving body of additional documentation
submitted by the Company to document each product's clinical safety and
performance. Although a quality system audit has been completed, there can be no
assurance that the Company will be successful in completing the remainder of the
CE Mark certification process or obtaining CE Mark certification in a timely
manner, if at all.
In the United States, medical devices are classified into three different
classes (Class I, Class II and Class III) on the basis of controls deemed
necessary to reasonably ensure the safety and effectiveness of the device. Class
I devices are subject to general controls (relating to labeling, premarket
notification and adherence to the FDA's good manufacturing practices ("GMPs"),
recently codified in the quality system regulation (the "QSR")). Class II
devices are subject to general and special controls (relating to performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness. They generally are life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices. Before a new
medical device can be marketed, marketing clearance must be obtained through a
premarket notification under Section 510(k) of the FDC Act or a premarket
approval ("PMA") application under Section 515 of the FDC Act. A 510(k)
clearance will typically be granted by the FDA if it can be established that the
device is substantially equivalent to a "predicate device," which is a legally
marketed Class I or Class II device or a preamendment Class III device (i.e.,
one that has been marketed since a date prior to May 28, 1976) for which the FDA
has not called for PMAs. The FDA has been requiring an increasingly rigorous
demonstration of substantial equivalence and this may include a requirement to
submit human clinical trial data. It generally takes four to twelve months from
the date of a 510(k) submission to obtain clearance, but it may take longer. The
FDA may determine that a medical device is not substantially equivalent to a
predicate device, or that additional information is needed before a substantial
equivalence determination can be made. A "not substantially equivalent"
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determination, or a request for additional information, could prevent or delay
the market introduction of new products that fall into this category. For any
devices that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or effectiveness, or
that constitute a major change in the intended use of the device, will require
new 510(k) submissions.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
preamendment Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission includes the proposed labeling,
advertising literature, and any training materials. The PMA can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing. Upon receipt
of a PMA application, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If the FDA
determines that the PMA application is sufficiently complete to permit a
substantive review, the FDA will accept the application for filing. Once the
submission is accepted for filing, the FDA begins an in-depth review of the PMA.
The FDA review of a PMA application generally takes one to three years from the
date the PMA is accepted for filing, but may take significantly longer. The
review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of clinicians
and others knowledgeable in the applicable field, may be convened to review and
evaluate the application and provide a recommendation to the FDA as to whether
the device should be approved. The FDA accords substantial weight to the
recommendation but is not bound by it. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure compliance with applicable QSR requirements, which include extensive
requirements relating to product design, manufacturing processes, testing,
control documentation and other quality assurance procedures.
If the FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When, and if, those conditions
have been fulfilled to the satisfaction of the FDA, the FDA will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be delayed for one or more years while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
If human clinical trials of a device are required, either for a 510(k)
premarket notification or a PMA application, and the device presents a
"significant risk," the sponsor of the trial must file an investigational device
exemption ("IDE") application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs, without the need for FDA review.
Submission of an IDE provides no assurance that the FDA will approve the IDE.
Even if the IDE is approved, there can be no assurance that the FDA will
determine that the data derived from the studies support the safety and efficacy
of the device or warrant the continuation of clinical studies. Sponsors of
clinical trials are permitted to sell investigational devices distributed in the
course of the study, provided such compensation
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does not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or investigator may make a change to the investigational plan that may
affect its scientific soundness or the rights, safety or welfare of human
subjects.
The Company anticipates that its products will be regulated as Class III
medical devices and will require PMA approval prior to being marketed in the
United States. If this is the case, the Company will need to obtain for each of
its products an IDE in order to conduct clinical trials in the United States.
There can be no assurance that the Company will receive Class III medical device
designation for its products or that it will be able to obtain IDEs for each of
its planned products or that data from such clinical studies if and when
commenced will demonstrate the safety and effectiveness of the Company's product
or will adequately support a PMA application.
If clearance or approval for a given product of the Company is obtained,
such product will be subject to pervasive and continuing regulation by the FDA.
For example, the Company will be subject to routine inspection by the FDA and
will have to comply with the host of regulatory requirements that usually apply
to medical devices marketed in the United States, such as labeling regulations,
applicable QSR requirements, the Medical Device Reporting ("MDR") regulations
(which require a manufacturer to report to the FDA certain types of adverse
events involving its products), and the FDA prohibitions against promoting
products for unapproved or "off-label" uses. Any failure by the Company to
comply with applicable regulatory requirements could result in the detention or
seizure of products, issuance of an enjoinment of future product activities and
the assessment of civil and criminal penalties against the Company, its officers
and its employees. Failure to comply with the regulatory requirements could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, regulations regarding the manufacture and
sale of the Company's products are subject to change. The Company cannot predict
the effect, if any, that such changes might have on its prospects, business,
financial condition or results of operations.
In November 1997, the President of the United States signed into law the
FDA Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDC Act and other provisions in the FDC Act affecting the
regulation of devices. Among other things, the changes will affect the IDE,
510(k) and PMA processes, and also will affect device standards and data
requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third party review, and the
dissemination of off label information. The Company cannot predict how or when
these changes will be implemented or what effect the changes will have on the
regulation of the Company's products.
Although the Company anticipates that its products will be classified by
the FDA as medical devices, in the event that a given product is classified by
the FDA as a drug, it will require FDA approval of a new drug application
("NDA") prior to commercialization in the United States. The NDA process is
generally more onerous, costly and lengthy than the PMA process, often requiring
more extensive preclinical and clinical testing. Many products for which NDAs
have been submitted by other companies have never been approved for marketing.
Before clinical studies of a new drug can begin, an investigational new drug
("IND") application must be submitted to the FDA. FDA regulations provide that
human clinical trials may begin thirty days following submission of an IND
application, unless the FDA advises otherwise or requests additional
information, clarification or additional time to review the application. An IND
application contains extensive preclinical data and information about the drug.
There can be no assurance that the Company will develop sufficient data and
information to submit an IND for its products or that such data and information
if submitted, would be sufficient for the purposes of commencing clinical
studies of the products. Delays in the receipt of or failure to obtain FDA
authorization to begin or continue clinical trials could have a material adverse
effect on the Company's business, financial condition or results of operations.
The FDA regulates the manufacturing, product testing, and marketing of both
medical devices and drugs. Manufacturers of drugs are required to comply with
applicable GMP and, in the case of medical devices, QSR requirements, which
include requirements relating to product design, manufacturing processes,
product
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testing, and quality assurance, as well as the corresponding maintenance of
records and documentation. There is no assurance that the Company will be able
to comply with the applicable QSR requirements. In addition, the Company is
required to provide information to the FDA on death or serious injuries alleged
to have been associated with the use of its medical devices, as well as product
malfunctions that would likely cause or contribute to death or serious injury if
the malfunction were to recur. Failure of the Company to comply with QSR
regulations, or other FDA regulatory requirements, could have a material adverse
effect on the Company's business, financial conditions, or results of
operations.
CoStasis contains thrombin, which is a FDA-licensed biological drug.
Consequently, the FDA considers CoStasis to be a combination product subject to
jurisdiction by the Center for Biologics Evaluation and Research ("CBER") and
the Center for Devices and Radiological Health ("CDRH"). The FDA has assigned
lead review responsibility to CDRH following a "Request for Designation"
determination by the FDA in September 1996. The Company believes that this
decision was significant, as fibrin sealants containing human plasma are
regulated as biological drugs, which may substantially increase the duration and
complexity of their regulatory approval processes compared to that of CoStasis.
The collagen used in the Company's products is derived from U.S. cattle.
Bovine Spongiform Encephalopathy ("BSE") is a disease, initially reported in
cattle in the United Kingdom, characterized by degenerative lesions of the
central nervous system. The source of infections in animals derives from eating
infected sheep-derived feed. While the disease has been reported in European
countries, the Company is not aware of any reports of BSE in U.S. cattle to
date. There can be no assurance that the various foreign or domestic regulatory
authorities will not raise issues regarding BSE or other matters which may
adversely affect the Company's ability to manufacture, market or sell its bovine
collagen-based products, which could have a material and adverse effect on the
Company's business, financial condition and results of operations.
THIRD PARTY REIMBURSEMENT
Reimbursement and health care payment systems in international markets vary
significantly by country. In connection with international product
introductions, the Company and any future strategic marketing partners may be
required to seek international reimbursement approvals. If required, there can
be no assurance that any such approvals will be obtained in a timely manner, or
at all, and failure to receive such international reimbursement approvals could
have an adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payers, there will be no separate,
additional reimbursement for the Company's products and therefore no assurance
that reimbursement for the Company's products will be available in the United
States or in international markets under either governmental or private
reimbursement systems. Furthermore, the Company could be adversely affected by
changes in reimbursement policies of governmental or private health care payors.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from health care payors for procedures in which
the Company's products are used or adverse changes in governmental and private
third party payors' policies toward reimbursement for such procedures would have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's business may be also materially and
adversely affected by the continuing efforts of government and third-party
payors to contain or reduce the costs of health care through various means. See
"Risk Factors -- Third Party Reimbursement."
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of the Company's products may expose
the Company to product liability claims. Although to date no claim has been
asserted against the Company, there can be no assurance
56
<PAGE> 59
that the Company will not experience losses due to product liability claims in
the future. Although the Company currently has general liability insurance with
coverage in the amount of $1 million per occurrence, subject to a $2 million
annual limitation, and product liability insurance with coverage in the amount
of $5 million per occurrence, subject to a $5 million annual limitation, there
can be no assurance that such coverage will be available to the Company in the
future on reasonable terms, if at all. In addition, there can be no assurance
that all of the activities encompassed within the Company's business are or will
be covered under the Company's policies. The Company may require additional
product liability coverage if the Company significantly expands
commercialization of its products. Such additional coverage is expensive,
difficult to obtain and may not be available in the future on acceptable terms,
if at all. Any claims or series of claims against the Company, regardless of
their merit or eventual outcome, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Potential Product Liability Exposure; Limited Insurance Coverage."
FACILITIES
The Company occupies approximately 55,000 square feet of facilities in Palo
Alto, California. The Company has leased these facilities under agreements that
expire between 1999 and 2004 and contain renewal options. The Company believes
that its facilities are adequate to meet its requirements through at least the
end of 1999.
EMPLOYEES
At March 31, 1998, the Company had 69 employees, 39 of whom were engaged
directly in research and new product development, seven in regulatory affairs,
quality assurance and clinical activities, eight in manufacturing, two in sales
and marketing and 13 in finance and administration. The Company maintains
compensation, benefits, equity participation, and work environment policies
intended to assist in attracting and retaining qualified personnel. The Company
believes the success of its business will depend, in significant part, on its
ability to attract and retain such personnel. No employee of the Company is
represented by a collective bargaining agreement, nor has the Company
experienced any work stoppage. The Company considers its relations with its
employees to be good. See "Risk Factors -- Uncertainty of Ability to Attract and
Retain Key Management, Employees and Consultants."
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<PAGE> 60
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information as of May 29, 1998 with respect to
the Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David Foster........................... 40 Chief Executive Officer, Director
Frank DeLustro, Ph.D. ................. 50 President and Chief Operating Officer,
Director
Ross Erickson.......................... 52 Vice President, Regulatory Affairs and
Clinical Research
Charles Williams....................... 56 Vice President, Operations
Alan Schempp........................... 46 Vice President, Sales and Marketing
Deborah Webster........................ 38 Vice President and Chief Administrative
Officer
Sharon Kokubun......................... 42 Vice President, Financial Operations
John Daniels, M.D.(1)(2)............... 59 Chairman of the Board
Reid Dennis(1)(2)...................... 71 Director
Craig Johnson.......................... 50 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
David Foster, Chief Executive Officer and Director. Mr. Foster has served
as Chief Executive Officer of the Company since January 1998. From February 1997
to December 1997 he served as Senior Vice President and General Manager,
Collagen Technologies Group. From May 1992 until February 1997, Mr. Foster
served as Chief Financial Officer of Collagen. Mr. Foster serves on the Board of
Directors of Pharming, B.V. and Innovasive Devices, Inc. Mr. Foster has a B.S.
in Mechanical Engineering and an M.B.A. from the University of California at
Berkeley.
Frank DeLustro, Ph.D., President, Chief Operating Officer and Director. Dr.
DeLustro has served as President and Chief Operating Officer of the Company
since December 1997. He served as President and Chief Executive Officer of
Cohesion Corporation from its inception in 1996 until January 1998. Prior to
joining Cohesion Corporation, Dr. DeLustro served at Collagen for 13 years in
positions of increasing responsibility, most recently as Senior Vice President,
Scientific Affairs. Dr. DeLustro has a B.S. in Biology from Fordham University
and a Ph.D. in Immunology/Microbiology from Upstate Medical School, SUNY
(Syracuse). He is the author of over 40 scientific publications and holder of 18
U.S. patents.
Ross Erickson, Vice President, Regulatory Affairs and Clinical
Research. Mr. Erickson has served as Vice President, Regulatory Affairs and
Quality Assurance of the Company since January 1998. He was Vice President of
Regulatory Affairs and Clinical Affairs at Cohesion Corporation from May 1996 to
December 1997. From January 1987 to April 1996, he held various positions with
Collagen and was Vice President of Regulatory Affairs and Quality Assurance from
1991. Mr. Erickson has a B.A. and M.A. from Western Michigan University.
Charles Williams, Vice President, Operations. Mr. Williams has served as
Vice President, Operations of the Company since January 1998. He served as Vice
President, Operations of Cohesion Corporation from March 1997 to December 1997.
Prior to joining Cohesion Corporation, Mr. Williams served as Vice President of
Operations at Collagenesis, Inc., a medical device company from December 1996 to
March 1997, and as Vice President of Operations at Fusion Medical Technologies,
Inc., a medical device company from March 1995 to November 1996. From March 1992
to March 1995, Mr. Williams served as Vice President, Manufacturing Operations
at The Liposome Company, a pharmaceutical company. Mr. Williams has a B.S. in
Chemical Engineering from the University of Tennessee and a M.S. in Biochemical
Engineering from Rutgers University.
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<PAGE> 61
Alan Schempp, Vice President, Sales and Marketing. Mr. Schempp has served
as Vice President, Sales and Marketing of the Company since January 1998. From
November 1997 to December 1997, he served as a Vice President, Marketing and
Business Development of Cohesion Corporation. Prior to that time, he was a
founder and president of Quicksilver Medical, a medical device consulting
company from June 1996 to September 1997, and a director of Endoscopic Imaging
Systems, a medical device company he co-founded from June 1995 to June 1996. Mr.
Schempp was a co-founder of and served as Vice President, Sales and Marketing
for Intramed Laboratories, a medical device company, from 1987 to 1995. Mr.
Schempp has a B.F.A. from the University of Kansas and an M.B.A. from the
University of Phoenix.
Deborah Webster, Vice President and Chief Administrative Officer. Ms.
Webster has served as Vice President and Chief Administrative Officer of the
Company since January 1998. Ms. Webster joined Collagen in 1982 and served in
various human resource and management positions until 1991, when she was
appointed to Vice President Human Resources and Administrative Services. Ms.
Webster has a B.A. from the University of California at Berkeley and completed
the Stanford University Executive Program at the Graduate Business School.
Sharon Kokubun, Vice President, Financial Operations. Ms. Kokubun has
served as Vice President, Financial Operations of the Company since January
1998. Ms. Kokubun joined Collagen in April 1988 as Assistant Controller and was
promoted in February 1994 to Treasurer. Ms. Kokubun is a certified public
accountant and has an M.B.A. in finance from the University of Hawaii.
John Daniels, M.D., Chairman of the Board. Dr. Daniels has been Chairman of
the Company's Board of Directors since January 1998 and has served on the Board
of Directors of Collagen since 1977 and is an Associate Professor of
Medicine/Oncology at the University of Southern California. Dr. Daniels is also
Chairman of the Board and Chief Financial Officer of Balance Pharmaceuticals,
Inc., a pharmaceutical company, and President, Chief Executive Officer and a
director of Regional Therapeutics, Inc. Dr. Daniels has a B.S. in biology and an
M.D. from Stanford University. Dr. Daniels plans to resign from the Board of
Directors of Collagen upon completion of the Distribution.
Reid Dennis, Director. Mr. Dennis has been a director of the Company since
January 1998, and a director of Collagen since 1975. Mr. Dennis served as
President of Collagen from February 1976 to March 1978, as Chairman of the Board
from March 1978 to February 1995, and has served as Chairman Emeritus of
Collagen since February 1995. Mr. Dennis is a General Partner of various
partnerships associated with Institutional Venture Partners. Mr. Dennis has a
B.A. in Electrical Engineering and an M.B.A. from Stanford University. Mr.
Dennis plans to resign from the Board of Directors of Collagen upon completion
of the Distribution.
Craig Johnson, Director. Mr. Johnson has been a director of the Company
since January 1998, and a director of Collagen since 1991. Mr. Johnson has been
a Director of Venture Law Group, A Professional Corporation, principal outside
counsel to the Company, and a partner of its predecessor partnership since
February 1993. From 1980 to February 1993, Mr. Johnson was a member of the law
firm of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation. Mr.
Johnson plans to resign from the Board of Directors of Collagen upon completion
of the Distribution. He also serves on the Board of Directors of Retix, Inc.
The Company currently has authorized a Board of Directors of five. Each
director is elected for a period of one year at the Company's annual meeting of
stockholders and serves until the next annual meeting or until his or her
successor is duly elected and qualified. The executive officers serve at the
discretion of the Board of Directors. There are no family relationships among
any of the directors and/or executive officers of the Company.
DIRECTOR COMPENSATION
The Company does not currently provide cash compensation to directors for
services in such capacity. Each nonemployee director after the Distribution will
be eligible to participate in the Company's 1998 Directors' Stock Option Plan,
pursuant to which nonemployee directors are automatically granted options to
purchase shares of Common Stock on the terms and conditions set forth in such
plan.
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<PAGE> 62
BOARD COMMITTEES
In March 1998, the Board established the Audit Committee and the
Compensation Committee. The Audit Committee recommends engagement of the
Company's independent auditors, reviews the scope of the audit, considers
comments made by the independent auditors with respect to the Company's internal
control structure, including systems, procedures and internal accounting
controls and the consideration given thereto by management, and reviews the
Company's internal control structure, including systems, procedures and internal
accounting controls, with the Company's financial and accounting staff. The
Audit Committee currently consists of directors Mr. Dennis and Dr. Daniels. The
Compensation Committee provides guidance and commentary for all corporate
compensation, benefits, perquisite and employee (and director) equity programs.
It reviews and makes recommendations to the Board regarding such matters as the
Company's compensation of its officers, all employee equity plans and individual
equity grants and bonus plans and bonus payments. The Compensation Committee
currently consists of Mr. Dennis and Dr. Daniels.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are currently Messrs. Dennis and Daniels, neither of which has in over
ten years been an officer or employee of the Company or Collagen or any
subsidiary of Collagen.
SCIENTIFIC ADVISORY BOARD
The Company is assisted in its research and development activities by its
Scientific Advisory Board (the "SAB"), composed of leading scientists who review
the Company's research and development activities, discuss technological
advances relevant to the Company and its business, and otherwise assist the
Company, as appropriate. The members of the SAB are listed below.
Francis Castellino, Ph.D., is the Kleiderer-Pezold Professor of
Biochemistry and Dean of the College of Arts and Sciences at the University of
Notre Dame in South Bend, Indiana. He has conducted research in the areas of
fibrinolysis and blood coagulation since his arrival at Notre Dame in 1970. His
ongoing efforts to discover and define the structure-function relationships of
coagulation and fibrinolytic enzymes have led him to develop extensive
publications on the expression and identification of proteins and protein
domains. He received his B.S. from the University of Scranton, M.S. and Ph.D. in
Biochemistry from the University of Iowa.
Caroline Damsky, Ph.D., is a Professor at the University of California at
San Francisco, Schools of Dentistry and Medicine. Dr. Damsky conducts research
in many areas, including the areas of cellular adhesion and invasion,
adhesion-related signaling mechanisms and adhesive interactions in the
development of cancer. Dr. Damsky received her B.A. from Stanford University, an
M.A. and a Ph.D. from the University of Pennsylvania, performed post-doctoral
work at the University of Pennsylvania and the Wisar Institute and has authored
over 75 published works.
Jack Lemons, Ph.D., is a Professor in the Department of Biomaterials at the
University of Alabama School of Dentistry and a Professor in the Department of
Surgery at the University of Alabama School of Medicine. He is also a Director
of Orthopedic Laboratory Research, a Professor of Biomedical and Materials
Engineering and a Professor of the Joint Materials Science Program at the
University of Alabama. He is also an Adjunct Professor of Prosthodontics at the
University of Pittsburg School of Dental Medicine. He received his B.S., M.S.
and Ph.D. from the University of Florida.
Alan S. Michaels, Sc.D., is a graduate of the Massachusetts Institute of
Technology and served as Professor of Engineering at that institution from 1948
to 1966. He currently has his own industrial consulting practice, Alan Sherman
Michaels, Sc.D., Inc. In 1962, he founded and was President of Amicon
Corporation, an enterprise which pioneered the development of membrane
ultrafiltration. Dr. Michaels also founded and was President of Pharmetrics
Inc., in 1970, which was later acquired by Alza Corporation in 1972. He has been
a Professor of Chemical Engineering and Medicine at Stanford University as well
as a Distinguished
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<PAGE> 63
University Professor at North Carolina State University and is a member of the
National Academy of Engineering.
Francesco Ramirez, Ph.D., is Deputy Director at the Brookdale Center for
Developmental and Molecular Biology, Co-Director of the Interdisciplinary
Graduate School Program in Cellular, Molecular and Biological Sciences and the
Dr. Amy and James Elster Professor of Molecular Biology and Professor of
Pediatrics at the Mount Sinai School of Medicine. Dr. Ramirez is the author of
numerous scientific publications and awards. He received his M.A. from Liceo
Classico Garibaldi and a D.Sc. from the Universita degli Studi di Palermo, and
has authored over 120 published works.
Dean Toriumi, M.D., is an Associate Professor in the Department of
Otolaryngology-Head and Neck Surgery at the University of Illinois at Chicago
and is board-certified in otolaryngology and facial plastic and reconstructive
surgery. He is a member of several professional societies, including the
American Academy of Otolaryngology-Head and Neck Surgery, the American Academy
of Facial Plastic and Reconstructive Surgery, and the American College of
Surgeons. Dr. Toriumi is presently the Secretary of the American Academy of
Facial Plastic and Reconstructive Surgery. Dr. Toriumi also serves on the
editorial boards of several journals, including Facial Plastic Surgery,
Otolaryngology-Head & Neck Surgery, Long-Term Effects of Medical Implants and
Operative Techniques in Otolaryngology-Head & Neck Surgery.
CLINICAL ADVISORY BOARD
The Clinical Advisory Board assists the Company in identifying potential
new uses for its product candidates and helps to refine product formulations to
better address problems encountered during product development.
Arthur Hill, M.D., is a board certified thoracic and general surgeon with
expertise in thoracic and cardiac surgery. He is a fellow of both the American
College of Surgeons and the American College of Cardiology. Dr. Hill trained in
thoracic surgery at the Stanford University Medical Center and trained in
General Surgery at the University of California at Los Angeles. Dr. Hill is the
author of numerous scientific articles in the areas of thoracic and cardiac
surgery. Dr. Hill received his medical degree from Tufts University and was a
Post Doctoral Fellow of the Cardiovascular Research Institute at the University
of California, San Francisco.
Gail Lebovic, M.A., M.D., is a board-certified general surgeon with
expertise in breast, laparoscopic and endocrine surgery. She is a Fellow of the
American College of Surgeons and is founder and chairperson of the Bay Area
Breast Center. She practices in Palo Alto, California, and is an attending
surgeon at the Stanford University Medical Center and the Plastic Surgery
Center. Dr. Lebovic received her M.D. from the George Washington University
School of Medicine.
Camran Nezhat, M.D., holds clinical faculty appointments in surgery,
gynecology and obstetrics at the Stanford University School of Medicine and is
director of the Stanford Endoscopy Center for Training and Technology. Dr.
Nezhat was a pioneer in the use of video cameras in laparoscopic surgery and has
authored two books and more than 100 articles on this and other areas of
surgery. He is a member of several professional societies, including the
American College of Obstetrics and Gynecologists and American College of
Surgeons, and has received many awards, including the Society of Laparoscopic
Surgeons Excel Award in 1995. Dr. Nezhat received his M.D. from Tehran
University.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation received for services rendered during the fiscal year ended June
30, 1997 to Collagen Corporation and to Cohesion Corporation, as applicable, by
the Company's Chief Executive Officer, David Foster, and each of Frank DeLustro,
Ph.D., Ross Erickson, Deborah Webster and Charles Williams, the other four most
highly compensated executive officers of the Company (the "Named Executive
Officers"). Each of such person's aggregate compensation during the last fiscal
year exceeded, or would exceed on an annualized basis, $100,000. The services
rendered by the Named Executive Officers to Collagen and the Company, as
applicable, were in capacities not equivalent to those to be provided to the
Company. Therefore, the
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<PAGE> 64
information set forth below may not reflect the compensation to be paid to such
individuals and should not be relied on as being indicative of the Company's
compensation structure and policies.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
----------------------------------------- --------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION(1)($) OPTIONS(2)(#) COMPENSATION($)
--------------------------- --------- -------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
David J. Foster(3)........... 160,263 47,600 -- 6,000(4) 453(5)
Senior Vice President and
General Manager Collagen
Technologies Group (Collagen)
Frank DeLustro, Ph.D.(6)..... 179,570 -- -- -- 1,081(7)
President and Chief Executive
Officer (Cohesion
Corporation)
Ross Erickson(8)............. 163,212 -- -- -- 1,592(9)
Vice President, Regulatory
Affairs and Clinical Research
(Cohesion Corporation)
Deborah Webster(10).......... 148,187 41,620 -- 6,000(11) 4,608(12)
Vice President, Human
Resources and Administrative
Services (Collagen)
Charles Williams(13)......... 43,075 -- -- 35,000(14) 608(15)
Vice President, Operations
(Cohesion Corporation)
</TABLE>
- ---------------
(1) The value of perquisites or personal benefits is not included in the
amounts disclosed if, in the aggregate for any named individual, it did not
exceed the lesser of $50,000 or ten percent of total salary and bonus
reported for such individual in the Summary Compensation Table.
(2) This table does not reflect options granted subsequent to the close of
fiscal 1997, which may represent grants partially in recognition of fiscal
1997 performance.
(3) Mr. Foster is Chief Executive Officer of the Company.
(4) Represents options to purchase Collagen Common Stock at $16.75 per share.
(5) Represents life insurance premiums of $453 paid on behalf of Mr. Foster.
(6) Dr. DeLustro is President and Chief Operating Officer of the Company.
(7) Represents life insurance premiums of $1,081 paid on Dr. DeLustro's behalf.
(8) Mr. Erickson is Vice President, Regulatory Affairs and Clinical Research of
the Company.
(9) Represents life insurance premiums of $1,592 paid on Mr. Erickson's behalf.
(10) Ms. Webster is Vice President and Chief Administrative Officer of the
Company.
(11) Represents options to purchase Collagen Common Stock at $16.75 per share.
(12) Represents $4,285 paid to Ms. Webster for a 15-year service award and life
insurance premiums of $323 paid on behalf of Ms. Webster.
(13) Mr. Williams is Vice President, Operations of the Company.
(14) Represents 35,000 options to purchase Cohesion Corporation Common Stock at
$0.70 per share.
(15) Represents life insurance premiums paid on Mr. Williams' behalf of $608.
OPTION GRANTS
The following table provides certain summary information regarding stock
options granted to the Named Executive Officers during the fiscal year ended
June 30, 1997. As a result of the Distribution, each option to purchase Collagen
Common Stock granted to the Named Executive Officers listed below will be
replaced with either a new option to purchase shares of Collagen Common Stock, a
new option to purchase shares of the Company Common Stock or new options to
purchase shares of both Collagen Common Stock and the
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<PAGE> 65
Company Common Stock, as provided in the Benefits Agreement. As a result, their
value may depend, in part, on the future value of Collagen Common Stock as well
as the future value of the Company Common Stock. See "Relationship Between
Collagen and the Company After the Distribution." Additionally, following the
Distribution and approval by the Board of Directors, the Company anticipates
offering to exchange or substitute the outstanding options of Cohesion
Corporation for options to acquire the Common Stock of the Company. The services
rendered by the Named Executive Officers to Collagen and the Company, as
applicable, were in capacities not equivalent to those to be provided to the
Company. Therefore, the information set forth below should not be relied on as
being indicative of the Company's compensation structure and policies.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS(1) REALIZABLE VALUE AT
------------------------------------------------------- ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM($)(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR(%) ($/SHARE) DATE 5% 10%
---- ----------- -------------- ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
David J. Foster.................. 6,000 1.39(3) 16.75 08/09/06 63,204 160,171
Frank DeLustro, Ph.D............. 0 N/A N/A N/A N/A N/A
Ross Erickson.................... 0 N/A N/A N/A N/A N/A
Deborah Webster.................. 6,000 1.39(3) 16.75 08/09/06 63,204 160,171
Charles Williams................. 35,000 26.32(4) 0.70 05/09/07 15,408 39,047
</TABLE>
- ---------------
(1) Consists of stock options granted pursuant to Collagen and Cohesion
Corporation stock option plans. The maximum term of each option granted is
ten years from the date of grant. The exercise price is equal to the fair
market value of the stock on the grant date.
(2) Potential realizable value amounts represent certain assumed rates of
appreciation in stock price for a given exercise price only and assume the
conversion or exchange of all options to purchase Collagen Common Stock and
Cohesion Corporation's Common Stock into options to purchase the Company's
Common Stock. Actual gains, if any, on stock option exercises and holdings
of applicable shares of Collagen Common Stock or Cohesion Corporation Common
Stock or the Company's Common Stock are dependent on the future performance
of the applicable stock. There is no assurance that the amounts reflected
will be realized. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's, Cohesion Corporation's or
Collagen's estimate or projection of future stock prices. There can be no
assurance that the actual stock price appreciation over the ten-year option
term will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the applicable shares of Collagen Common Stock,
Cohesion Corporation's or the Company's Common Stock appreciates over the
option term, no value will be realized from the option grants made to the
Named Executive Officers.
(3) Out of a total of 432,750 options granted during the last fiscal year to
purchase Collagen Common Stock.
(4) Out of a total of 133,000 options granted during the last fiscal year to
purchase Cohesion Corporation Common Stock.
OPTION EXERCISES AND HOLDINGS
The following table provides certain summary information for each Named
Executive Officer with respect to Collagen and Cohesion Corporation option
exercises for the Common Stock of Collagen and Cohesion Corporation, as
applicable, for the year ended June 30, 1997. As a result of the Distribution,
each option granted to the Named Executive Officers in Collagen listed below
will be replaced with either a new option to purchase shares of Collagen Common
Stock, a new option to purchase shares of the Company Common Stock or new
options to purchase shares of both Collagen Common Stock and the Company Common
Stock, as provided in the Benefits Agreement and, as a result, their value may
depend, in part, on the future value of Collagen Common Stock as well as the
future value of the Company Common Stock. See "Relationship Between Collagen and
the Company After the Distribution." Additionally, following the Distribution
and approval by the Board of Directors, the Company anticipates offering to
exchange or
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<PAGE> 66
substitute the outstanding options of Cohesion Corporation for options to
acquire the Common Stock of the Company. The services rendered by the Named
Executive Officers to Collagen and Cohesion Corporation, as applicable, were in
capacities not equivalent to those to be provided to the Company. Therefore, the
information set forth below should not be relied on as being indicative of the
Company's compensation structure and policies. Additionally, it should be noted
that while the information set forth below refers to "exercisable" and
"unexercisable" options, all of such options may be exercised immediately, and,
if exercised, the unvested portion of the option remains subject to a right of
repurchase from the applicable entity.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES ON JUNE 30, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END(#) AT FISCAL YEAR-END($)(1)(2)(3)
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE(#) REALIZED($)(3) UNEXERCISABLE) UNEXERCISABLE)
---- ----------- -------------- ---------------------- ------------------------------
<S> <C> <C> <C> <C>
David J. Foster(4)........ 0 0 36,340 / 12,460 3,100 / 6,400
Frank DeLustro, Ph.D. .... 3,300(5) 49,500 87,468 / 70,712(6) 24,783 / 48,067
1,000(5) 10,875
Ross Erickson............. 0 0 52,810 / 73,310(8) 25,983 / 28,980
Deborah Webster(7)........ 41 400 41,610 / 11,340 44,491 / 5,840
Charles Williams(9)....... 0 0 0 / 35,000 0 / 24,500
</TABLE>
- ---------------
(1) The fair market value of Collagen's Common Stock as quoted on the Nasdaq
National Stock Market at the close of business on June 30, 1997 was $17.50
per share.
(2) The estimated fair market value for Cohesion Corporation's Common Stock on
June 30, 1997, as determined by Cohesion Corporation's Board of Directors,
was $0.70.
(3) The "Value Realized" or the unrealized "Value of Unexercised In-the-Money
Options at fiscal-year-end" represent the aggregate difference between the
market value on the date of exercise or at June 30, 1997, in the case of the
unrealized values, and the applicable exercise price.
(4) Mr. Foster's options referenced in this table are options to purchase
Collagen Common Stock.
(5) Dr. DeLustro exercised during fiscal year 1997 (i) 3,300 options to purchase
Collagen Common Stock with an exercise price of $7.25 and (ii) 1,000 options
to purchase Collagen Common Stock with an exercise price of $6.3750 per
share. The fair market value of Collagen Common Stock as quoted on the
Nasdaq National Stock Market on these dates was $22.25 and $17.25,
respectively.
(6) Represents 54,135 exercisable and 4,045 unexercisable options to purchase
Collagen Common Stock. The balance represent options to purchase Cohesion
Corporation Common Stock. All Cohesion Corporation options are immediately
exercisable, subject to a right of repurchase by Cohesion Corporation for
the unvested portion.
(7) Ms. Webster's options referenced in this table are options to purchase
Collagen Common Stock.
(8) Represents 32,810 exercisable and 3,310 unexercisable options to purchase
Collagen Common Stock. The balance represent options to purchase Cohesion
Corporation Common Stock. All Cohesion Corporation options are immediately
exercisable, subject to a right of repurchase by Cohesion Corporation for
the unvested portion.
(9) Mr. Williams' options referenced in this table are options to purchase
Collagen Corporation Common Stock.
TREATMENT OF STOCK OPTIONS OUTSTANDING AS OF THE DISTRIBUTION DATE
Options held by Employees and Consultants
Each employee (including officers) and consultant of Collagen or any
subsidiary of Collagen who, immediately prior to the Distribution Date, holds a
vested stock option to purchase shares of Collagen Common Stock will, in
connection with the Distribution, receive two new options in replacement of the
original option, one to acquire shares of Collagen Common Stock and the other to
acquire shares of the
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<PAGE> 67
Company's Common Stock. Each new option will give the holder the right to
purchase a number of shares equal to the number of shares in the original
option.
Each employee (including officers) and consultant of Collagen or any
subsidiary of Collagen who, immediately prior to the Distribution Date, holds an
unvested stock option to purchase shares of Collagen Common Stock will, in
connection with the Distribution, receive a new option in replacement of the
original option to acquire the same number of shares of Common Stock of the
entity (the Company or Collagen) by which such optionee shall be employed or
retained as a consultant following the Distribution.
The exercise price of each new option will be determined in accordance with
Emerging Issues Task Force Issue 90-9 as to be agreed upon by Cohesion's Board
and the Collagen Board (or any committee thereof), after consultation with legal
and accounting advisors. The exercise price of each new option received by
employees and consultants is expected to generally preserve any spread between
the exercise price of the replaced option and the fair market value of
Collagen's stock on the Distribution Date. The exercise price, as adjusted in
light of the above considerations, is not intended to result in any compensation
expense to the Company or Collagen. All other terms of the new options other
than the exercise price will be the same as those of the original options
provided, however, that service as an employee or consultant of Cohesion
Corporation or the Company shall be equivalent to providing service as an
employee or consultant of Collagen. At the option of the Collagen Board or the
Company's Board, out-of-the-money options may be treated differently.
Following the Distribution, the Company's Board and the Collagen Board may,
at their discretion, grant additional options to their respective employees
(including officers) and consultants at such time or times and having such terms
as are determined by the respective Board.
Following the Distribution and approval by the Board of Directors, the
Company anticipates offering to exchange or substitute the outstanding options
of its subsidiary Cohesion Corporation for options to acquire the Common Stock
of the Company. The new options are expected to have an exercise price
substantially less than the fair market value of the Company's shares at the
time of such exchange, based on an anticipated exchange ratio of 1.67 to 1 which
ratio will be determined by the Board of Directors. Assuming such offers are
accepted by the Cohesion Corporation option holders and assuming an expected
fair value of $10.00 per share at the date of the exchange, the Company expects
to record compensation expense of approximately $1.5 million at the date of the
exchange in connection with vested options and an additional $4.5 million of
deferred compensation to be amortized during the next three fiscal years.
Options for Non-Employee Directors
Each non-employee director of Collagen or any subsidiary of Collagen who,
immediately prior to the Distribution Date, holds a vested but not exercised
option to purchase shares of Collagen Common Stock will, in connection with the
Distribution, receive two new options in replacement of the original option, one
to acquire shares of Collagen Common Stock and the other to acquire shares of
Cohesion Common Stock. Each new option will give the holder the right to
purchase a number of shares equal to the number of shares in the original
option. Each non-employee director of Collagen who, immediately prior to the
Distribution Date, holds an unvested stock option to purchase shares of Collagen
Common Stock, will, in connection with the Distribution, receive a new option in
replacement of the original option to acquire the same number of shares of
Common Stock of the entity (Collagen or Cohesion) for which such optionee will
serve as a director following the Distribution.
The exercise price of each new option will be determined in accordance with
Emerging Issues Task Force Issue 90-9 as to be agreed upon by the Collagen Board
and the Cohesion Board (or any committees thereof), after consultation with
legal and accounting advisors. The exercise price of each new option received by
non-employee directors is expected to generally preserve any spread between the
exercise price of the replaced option and the fair market value of Collagen's
stock on the Distribution Date. The exercise price, as adjusted in light of the
above considerations, is not intended to result in any compensation expense to
Collagen or the Company. All other terms of the new options will be the same as
those of the original options; provided, however, that service as a director of
Cohesion Corporation or Cohesion shall be equivalent to providing service as a
director of Collagen. At the option of Collagen's Board or the Company's Board,
out-of-the-money options may be treated differently.
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Following the Distribution, each non-employee director of Collagen and
Cohesion will be eligible to participate in the 1998 directors' stock option
plan adopted by the company for which he or she serves as a director and to
receive automatic annual option grants pursuant to such plan.
STOCK PLANS
The Company's Board adopted, and Collagen, as the sole stockholder of the
Company in April 1998, approved the Company's 1998 Stock Option Plan, the 1998
Employee Stock Purchase Plan and the Director's Stock Option Plan (collectively,
the "Company Plans") and reserved 2,607,000 shares, 250,000 shares and 268,000
shares of Common Stock, respectively, for issuance under such plans on or after
the Distribution. The principal terms of each of the Company Plans are set forth
below.
1998 Stock Option Plan
The Company's 1998 Stock Option Plan (the "Stock Plan") was adopted by the
Board of Directors and approved by Collagen, as the sole stockholder, in April
1998. A total of 2,607,000 shares of Common Stock have been reserved for
issuance under the Stock Plan; none of which are currently outstanding. The
purposes of the Stock Plan are to attract and retain the best available
personnel to the Company, to provide additional incentives to the Company's
employees and consultants and to promote the success of the Company's business.
The Stock Plan provides for the granting to employees, including officers and
directors, of incentive stock options within the meaning of Section 422 of the
Code and for the granting to employees and consultants including nonemployee
directors of nonstatutory stock options. To the extent an optionee would have
the right in any calendar year to exercise for the first time one or more
incentive stock options for shares having an aggregate fair market value under
all plans of the Company and determined for each share as of the date the option
to purchase the shares was granted in excess of $100,000, any such excess
options shall be treated as nonstatutory stock options. If not terminated
earlier, the Stock Plan will terminate in April 2008.
Options granted under the Stock Plan may be either "incentive stock
options" within the meaning of Section 422 of the Code, or nonstatutory stock
options at the discretion of the Board of Directors and as reflected in the
written terms of the option agreement. The Stock Plan may be administered by the
Board of Directors or a committee of the Board of Directors (the
"Administrator"). The Stock Plan is currently administered by the Compensation
Committee. The Administrator determines the terms of options granted under the
Stock Plan, including the number of shares subject to the option, exercise
price, term and exercisability. In no event, however, may an individual employee
receive option grants for more than 250,000 shares under the Stock Plan in any
fiscal year. Such limitation shall not take effect until the earliest date
required under Section 162(m) of the Code. The exercise price of all incentive
stock options granted under the Stock Plan must be at least equal to the fair
market value of the Common Stock of the Company on the date of grant. The
exercise price of any incentive stock option granted to an optionee who owns
stock representing more than 10% of the total combined voting power of all
classes of outstanding capital stock of the Company or any parent or subsidiary
corporation of the Company (a "10% Stockholder") must equal at least 110% of the
fair market value of the Common Stock on the date of grant. The exercise price
of all nonstatutory stock options must equal at least 85% of the fair market
value of the Common Stock on the date of grant; provided, however, that the
exercise price of any nonstatutory stock option granted to a Named Executive
Officer must equal at least 100% of the fair market value of the Common Stock on
the date of grant. Payment of the exercise price may be made in cash or other
consideration as determined by the Administrator.
The Administrator determines the term of options, which may not exceed ten
years, or five years in the case of an incentive stock option granted to a 10%
Stockholder. No option may be transferred by the optionee other than by will or
the laws of descent or distribution. Each option may be exercised during the
lifetime of the optionee only by such optionee. The Administrator determines
when options become exercisable. Options granted under the Stock Plan generally
become exercisable at the rate of 25% of the total number of shares subject to
the options twelve months after the date of grant, and 2% of the total number of
shares subject to the options each month thereafter.
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In the event of the sale of all or substantially all of the assets of the
Company, or the merger of the Company with another corporation, then each option
shall be assumed or an equivalent option substituted by the successor
corporation unless the successor corporation does not agree to the assumption or
substitution, in which case each option will terminate upon the consummation of
the merger or sale of assets. The Administrator has the authority to amend or
terminate the Stock Plan as long as such action does not adversely affect any
outstanding option and provided that stockholder approval shall be required for
an amendment to increase the number of shares subject to the Stock Plan, to
change the designation of the class of persons eligible to be granted options,
or to change the limitation on grants to individual employees.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by Collagen as the sole
stockholder in April 1998. A total of 250,000 shares of Common Stock have been
reserved for issuance under the Purchase Plan; none of which are currently
issued. The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of overlapping offering periods of 24
months' duration, with new offering periods (other than the first offering
period) commencing on January 1 and July 1 of each year. Each offering period
will consist of four consecutive purchase periods of six months' duration. The
initial offering period is expected to commence on the later of July 1, 1998 or
the Distribution Date and end on June 30, 2000; the initial purchase period is
expected to end on December 31, 1998. The Purchase Plan will be administered by
the Compensation Committee (comprised of Dr. Daniels and Mr. Dennis, the outside
directors of the Company who are not eligible to participate in the Purchase
Plan). Employees, including officers and employee directors, of the Company, or
of any majority-owned subsidiary designated by the Board, are eligible to
participate in the Purchase Plan if they are employed by the Company or any such
subsidiary for at least 20 hours per week and more than five months per year.
The Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 15% of an employee's compensation, at a
price equal to the lower of 85% of the fair market value of the Company's Common
Stock at the beginning of each offering period or at the end of each purchase
period. Employees may end their participation in the offering at any time during
the offering period, and participation ends automatically on termination of
employment with the Company. If not terminated earlier, the Purchase Plan will
have a term of 20 years.
The Purchase Plan provides that, in the event of a merger of the Company
with or into another corporation or a sale of all or substantially all of the
Company's assets, each right to purchase stock under the Purchase Plan will be
assumed or an equivalent right substituted by the successor corporation unless
the Board of Directors shortens the offering period so that employees' rights to
purchase stock under the Purchase Plan are exercised prior to the merger or sale
of assets. The Board of Directors has the power to amend or terminate the
Purchase Plan as long as such action does not adversely affect any outstanding
rights to purchase stock thereunder.
1998 Directors' Stock Option Plan
The Directors' Plan was adopted by the Board of Directors and approved by
Collagen as the sole stockholder in April 1998. A total of 268,000 shares of
Common Stock have been reserved for issuance under the Directors' Plan; none of
which are currently outstanding. The Directors' Plan provides for the grant of
nonstatutory stock options to non-employee directors of the Company. The
Directors' Plan is designed to work automatically without administration;
however, to the extent administration is necessary, it will be performed by the
Board of Directors. To the extent they arise, it is expected that conflicts of
interest will be addressed by abstention of any interested director from both
deliberations and voting regarding matters in which such director has a personal
interest.
The Directors' Plan provides that each person who becomes a non-employee
director of the Company will be granted a nonstatutory stock option to purchase
10,000 shares of Common Stock (the "Initial Option") on the date on which the
optionee first becomes a non-employee director of the Company. On July 1 of each
year, each non-employee director of the Company, including non-employee
directors who did not receive an Initial Option, will be granted an option to
purchase 5,000 shares of Common Stock (an "Annual Option") if, on
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such date, he or she has served on the Board of Directors for at least six
months. The Directors' Plan sets neither a maximum nor a minimum number of
shares for which options may be granted to any one non-employee director, but
does specify the number of shares that may be included in any grant and the
method of making a grant. No option granted under the Directors' Plan is
transferable by the optionee other than by will or the laws of descent or
distribution or pursuant to a qualified domestic relations order, and each
option is exercisable, during the lifetime of the optionee, only by such
optionee.
The Directors' Plan provides that the Vested Restructured Options and the
Unvested Restructured Options shall be exercisable in accordance with the terms
under which the vested and unvested options to purchase Collagen Common Stock
were issued pursuant to the 1990 Directors' Plan; provided, however that service
as a director of Cohesion Corporation or the Company shall be equivalent to
providing service as a director of Collagen. The Directors' Plan further
provides that the Initial Option shall become exercisable in installments as to
25% of the total number of shares subject to the Initial Option on each of the
first, second, third and fourth anniversaries of the date of grant of the
Initial Option, and each Annual Option shall become exercisable in full on the
first anniversary of the date of grant of that Annual Option. If a non-employee
Director ceases to serve as a Director for any reason other than death or
disability, he or she may, but only within three months after the date he or she
ceases to be a Director of the Company, exercise options granted under the
Directors' Plan to the extent that he or she was entitled to exercise it at the
date of such termination. To the extent that he or she was not entitled to
exercise any such option at the date of such termination, or if he or she does
not exercise such option (which he or she was entitled to exercise) within such
three month period, such option shall terminate.
Options granted under the Directors' Plan have a term of ten years. In the
event of the dissolution or liquidation of the Company, a sale of all or
substantially all of the assets of the Company, the merger of the Company with
or into another corporation or any other reorganization of the Company in which
more than 50% of the shares of the Company entitled to vote are exchanged, each
non-employee director shall have either (a) a reasonable time within which to
exercise the option, including any part of the option that would not otherwise
be exercisable, prior to the effectiveness of such dissolution, liquidation,
sale, merger or reorganization, at the end of which time the option shall
terminate, or (b) the right to exercise the option, including any part that
would not otherwise be exercisable, or receive a substitute option with
comparable terms, as to an equivalent number of shares of stock of the
corporation succeeding the Company or acquiring its business by reason of such
dissolution, liquidation, sale, merger or reorganization. The Board of Directors
may amend or terminate the Directors' Plan; provided, however, that no such
action may adversely affect any outstanding option. If not terminated earlier,
the Directors' Plan will have a term of ten years.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Limitation of Liability of the Directors of the Company
The Company's Certificate of Incorporation provides that a director of the
Company will not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (a) for any breach of the director's duty of loyalty to the Company or
its stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 174 of
the Delaware General Corporation Law, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (d) for any transaction from which
the director derived an improper personal benefit. While the Company's
Certificate of Incorporation provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Company's Certificate of Incorporation has no effect on
the availability of equitable remedies such as an injunction or rescission based
on a director's breach of his or her duty of care. The provisions of the
Company's Certificate of Incorporation described above apply to an officer of
the Company only if he or she is a director of the Company and is acting in his
or her capacity as director, and do not apply to officers of the Company who are
not directors. The Company plans to enter into indemnification agreements with
its officers and directors.
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Indemnification of Directors and Officers
The Company's Certificate of Incorporation provides that each person who is
or was or has agreed to become a director or officer of the Company, or each
such person who is or was serving or has agreed to serve at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, will be indemnified by
the Company, in accordance with the Company's Bylaws, to the fullest extent
permitted from time to time by the Delaware Law, as the same exists or may
hereafter be amended or any other applicable laws as presently or hereafter in
effect. The Company may be required to indemnify any person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors or is a proceeding to enforce such person's claim to
indemnification pursuant to the rights granted by the Company's Certificate of
Incorporation or otherwise by the Company. In addition, the Company may enter
into one or more agreements with any person providing for indemnification
greater than or different from that provided in the Company's Certificate of
Incorporation.
The Company's Bylaws provide that each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative is or was a director, officer or employee of the
Company or any such person who is or was serving at the request of the Company
as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such Proceeding is
alleged action in an official capacity as a director, officer or employee or in
any other capacity while serving as a director, officer or employee, will be
indemnified and held harmless by the Company to the fullest extent authorized by
the Delaware Law as the same exists or may in the future be amended against all
expense, liability and loss (including attorneys' fees, judgments, fines,
amounts due under the Employee Retirement Income Security Act of 1974, as
amended, excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith;
provided, however, except as described in the next paragraph with respect to
Proceedings to enforce rights to indemnification, the Company will indemnify any
such person seeking indemnification in connection with a Proceeding (or part
thereof) initiated by such person only if such Proceeding (or part thereof) was
authorized by the Company's Board.
The Company's Bylaws provide that the right to indemnification and the
payment of expenses incurred in defending a Proceeding in advance of its final
disposition conferred in the Company's Bylaws will not be exclusive of any other
right which any person may have or may in the future acquire under any statute,
provision of the Company's Certificate of Incorporation, the Company's Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise.
Pursuant to the Company's Bylaws, if a claim is not paid in full by the Company
within 30 days after a written claim has been received by the Company, the
claimant may at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim and, if successful in whole or in part, the
claimant will also be entitled to be paid the expense of prosecuting such claim.
The Company's Bylaws provide that it will be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Company) that the claimant has not
met the standard of conduct which makes it permissible under the Delaware Law
for the Company to indemnify the claimant for the amount claimed, but the burden
of proving such defense will be on the Company. At present, the Company is not
aware of any pending or threatened litigation or proceeding involving a
director, officer, employee or agent of the Company in which indemnification
would be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
The Company believes that its charter provisions and indemnification agreements
are necessary to attract and retain qualified persons as directors and officers.
CHANGE OF CONTROL AGREEMENTS
The Company and Collagen entered into certain "change of control"
agreements with certain of the Company's executive officers pursuant to which
all options granted to such executive officers to purchase
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Collagen Common Stock shall immediately vest to the extent that such options
would have vested during the 24 months following the termination date, and all
options granted to such executive officers to purchase Common Stock of Cohesion
Corporation, a majority-owned subsidiary of the Company, shall immediately vest
to the extent that such options would have vested during the 24 months following
the change of control, in the event that such officer's employment is
involuntarily terminated without cause within a specified period of time
following a change of control of the Company or Collagen. Events constituting a
change of control include (i) any person acquiring 50% or more of the total
voting power represented by the Company's then outstanding voting securities
without the approval of the Company's Board; (ii) any person acquiring 50% or
more of the total voting power represented by Collagen's then outstanding voting
securities without the approval of Collagen's Board; (iii) any merger, sale of
assets or liquidation of the Company in which the Company's outstanding voting
securities prior to the transaction cease to represent at least 50% of the total
voting power represented by the voting securities of the Company or of the
surviving entity after the transaction; (iv) any merger, sale of assets or
liquidation of Collagen in which Collagen's outstanding voting securities prior
to the transaction cease to represent at least 50% of the total voting power
represented by the voting securities of Collagen or of the surviving entity
after the transaction; (v) replacing a majority of the Company's Board; or (vi)
replacing a majority of Collagen's Board. The change of control agreements will
expire by their own terms on the Distribution Date.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain expected information regarding the
beneficial ownership of the Company's Common Stock as of the Distribution Date
by (a) each of the Company's directors and Named Executive Officers, (b) all
directors and executive officers as a group, and (c) each person who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock. Based on information as of June 25, 1998, obtained from Collagen's
records, Cohesion Corporation's records and a review of statements filed with
the Securities and Exchange Commission pursuant to Sections 13(d) and 13(g) of
the 1934 Securities Exchange Act, the Company believes that the beneficial
ownership information at the time of the Distribution, will be as set forth
below.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED (1)(2)
--------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(%)
------------------------------------ --------- -------------
<S> <C> <C>
Wellington Management Company(3)............................ 1,195,500 13.5
75 State Street
Boston, MA 02109
Heartland Advisors, Inc.(4)................................. 1,079,800 12.2
790 North Milwaukee Street
Milwaukee, WI 53202
T. Rowe Price Associates, Inc.(5)........................... 727,400 8.2
100 East Pratt Street
Baltimore, MD 21202
Dimensional Fund Advisors, Inc.(6).......................... 504,050 5.7
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Reid W. Dennis(7)........................................... 703,043 7.9
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
John R. Daniels, M.D.(8).................................... 145,412 1.6
David J. Foster(9).......................................... 53,710 *
Frank DeLustro, Ph.D.(10)................................... 91,540 1.0
Deborah Webster(11)......................................... 52,476 *
Charles Williams(12)........................................ 17,047 *
Ross Erickson(13)........................................... 46,945 *
Sharon Kokubun(14).......................................... 15,581 *
Alan Schempp................................................ 0 *
Craig W. Johnson(15)........................................ 86,000 *
All directors and executive officers as a group (10 persons)
(16)...................................................... 1,230,043 13.8
</TABLE>
- ---------------
* Less than one percent of the outstanding shares of Common Stock.
(1) It has been assumed that (a) the persons named have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the other footnotes to this
table, (b) for every one share of Collagen Common Stock held, Collagen
Holders will receive one share of Common Stock as a dividend, as part of
the Distribution and (c) that (i) all shares of Cohesion Corporation Common
Stock, (ii) all options to purchase Cohesion Corporation Common Stock and
(iii) all options to purchase Collagen Common Stock, will be exchanged or
converted into Company Common Stock or options to purchase such stock, on a
1:67, 1:67 and 1:1 basis, respectively. It should be noted that the
Company, while it may offer to exchange or convert the Cohesion Corporation
shares of Common Stock or options to purchase such stock into shares of the
Company's Common Stock or options to purchase such stock, the Company's
Board of Directors has not yet decided to proceed with such an offer.
(2) Gives effect to the Distribution, as if it had occurred on June 25, 1998
and assumes that (a) as of June 25, 1998, 8,861,034 shares of Collagen
Common Stock were issued and outstanding, exclusive of shares held by
Collagen as treasury stock, and (b) based on that same number in (a) after
the Distribution, 8,861,034 shares of the Company's Common Stock will be
issued and outstanding.
(3) Wellington Management Company ("WMI") is an investment advisor registered
with the Securities and Exchange Commission (the "Commission") under the
Investment Advisors Act of 1940, as amended (the "1940 Act"). WMI
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may be deemed to beneficially own the stated shares by virtue of its status
as a registered investment advisor to its various investment advisory
clients. Of such amount, WMI may be deemed to have shared voting power with
respect to 594,400 shares and shared dispositive power with respect to
1,195,500 shares. The information presented is based upon information filed
with the Commission on Schedule 13G by the stockholder.
(4) Heartland Advisors, Inc., America's Value Investor ("Heartland Advisors")
is an investment advisor registered with the Commission under the 1940 Act.
Heartland Advisors may be deemed to beneficially own the stated shares by
virtue of its status as a registered investment advisor to its various
investment advisory clients. Of such amount, Heartland Advisors may be
deemed to have shared voting power with respect to 1,039,900 shares and
shared dispositive power with respect to 1,050,400 shares. The information
presented is based upon information filed with the Commission on Schedule
13G by the stockholder.
(5) T. Rowe Price Associates, Inc. may be deemed to beneficially own the stated
shares by virtue of its status as a registered investment advisor to its
various investment advisory clients. Of such amount, T. Rowe Price
Associates, Inc. may be deemed to have sole voting power with respect to
245,500 shares and sole dispositive power with respect to 717,000 shares.
The information presented is based upon information provided filed with the
Commission on Schedule 13G by the stockholder.
(6) Dimensional Fund Advisors, Inc. ("DFA") is an investment advisor registered
with the Commission under the 1940 Act. DFA may be deemed to beneficially
own the stated shares by virtue of its status as a registered investment
advisor to various investment advisory clients. Of such amount, DFA may be
deemed to have sole voting power with respect to 339,650 shares and sole
dispositive power with respect to 504,050 shares. The information presented
is based upon information filed with the Commission on Schedule 13G by the
stockholder.
(7) Includes 27,000 shares of Collagen Common Stock issuable upon exercise of
options; excludes 1,500 shares held by Mr. Dennis as trustee for Suzanna
Weaver Dennis, of which he disclaims any beneficial ownership.
(8) Includes 30,000 shares of Collagen Common Stock issuable upon exercise of
Collagen options and 1,667 shares of Cohesion Corporation Common Stock
issuable upon exercise of Cohesion Corporation options (assuming an
exchange factor of 1.67 of the Company options for every one Cohesion
Corporation option held).
(9) Includes 45,090 shares of Collagen Common Stock issuable upon exercise of
options.
(10) Includes 56,110 shares of Collagen Common Stock issuable upon exercise of
Collagen options and 10,416 shares of Cohesion Corporation Common Stock
issuable upon exercise of Cohesion Corporation options (assuming an
exchange factor of 1.67 of the Company options for every one Cohesion
Corporation option held).
(11) Includes 45,430 shares of Collagen Common Stock issuable upon exercise of
Collagen options.
(12) Includes 17,047 shares of Cohesion Corporation Common Stock issuable upon
exercise of Cohesion Corporation options (assuming an exchange factor of
1.67 of the Company options for every one Cohesion Corporation option
held).
(13) Includes 32,420 shares of Collagen Common Stock issuable upon exercise of
Collagen options and 12,525 shares of Cohesion Corporation Common Stock
issuable upon exercise of Cohesion Corporation options (assuming an
exchange factor of 1.67 of the Company options for every one Cohesion
Corporation option held).
(14) Includes 10,490 shares of Collagen Common Stock issuable upon exercise of
Collagen options.
(15) Includes 50,000 shares of Collagen Common Stock, options to purchase 33,000
shares of Collagen Common Stock, 7,257 shares of Cohesion Corporation
Common Stock and 3,243 shares held by VLG Investments ("VLGI"), an
investment fund affiliated with Mr. Johnson. Mr. Johnson disclaims
beneficial ownership of all shares held by VLGI, except to the extent of
his pecuniary interest therein.
(16) Includes an aggregate of 256,560 shares of Collagen Common Stock issuable
upon exercise of Collagen options and an aggregate of 63,321 shares of
Cohesion Corporation Common Stock issuable upon exercise of Cohesion
Corporation options (assuming an exchange factor of 1.67 of the Company
options for every one Cohesion Corporation option held).
LISTING AND TRADING OF THE COMMON STOCK
There is currently no public market for the Common Stock. Prices at which
the Common Stock may trade after the Distribution cannot be predicted and will
be determined by the marketplace and may be influenced by many factors,
including, among others, the depth and liquidity of the market for the Common
Stock, investor perception of the Company and its industry and general economic
and market conditions. See "Risk Factors -- No Prior Public Market; Volatility
of Common Stock Price."
The Company projects that it initially will have approximately 829
stockholders of record, based upon the number of stockholders of record of
Collagen on March 31, 1998. The Common Stock distributed to Collagen's
stockholders in the Distribution will be freely tradeable, except for securities
received by persons who may be deemed to be "affiliates" of the Company or
Collagen under the Securities Act. These persons who may be subject to certain
volume and other trading restrictions. Persons who may be deemed to be
"affiliates" of the Company or Collagen after the Distribution generally include
individuals or entities that control, are controlled by, or are under common
control with, the Company and may include certain officers and directors of the
Company and Collagen as well as principal stockholders of the Company and
Collagen.
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CERTAIN TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CollOptics, Inc.
In December 1992, Collagen purchased 800,000 shares of preferred stock of
CollOptics, Inc. ("CollOptics") for an aggregate of $500,000. In addition,
Collagen granted to CollOptics a license to use Collagen's technology in the
field of refractive surgery for long-term vision correction and entered into
certain other technology-related agreements with CollOptics. In September 1995,
Collagen purchased an additional 1,000,000 shares of CollOptics preferred stock
for an aggregate of $500,000. During fiscal 1997, CollOptics made certain
payments to Collagen, primarily for research and development services and the
reimbursement of expenses paid by Collagen, totaling $500,000. As of June 30,
1997, CollOptics owed Collagen $769,981 for research and development services
and the reimbursement of expenses paid by the Company. David J. Foster, Chief
Executive Officer of the Company and Dr. Frank DeLustro, President and Chief
Operating Officer of the Company, are directors of CollOptics. As of June 30,
1997, Collagen held a 47% equity interest in CollOptics. In connection with the
Distribution, all outstanding shares of CollOptics owned by Collagen and all
agreements between Collagen and CollOptics were transferred to the Company
effective January 1, 1998.
Cohesion Corporation
In November 1993, Collagen purchased from Cohesion Corporation, for
approximately $65,000, 50,000 shares of Preferred Stock ("Cohesion Corporation
Preferred Stock") and 200,000 shares of Common Stock ("Cohesion Corporation
Common Stock"). In April 1994, Collagen purchased 95,238 shares of Cohesion
Corporation Preferred Stock for approximately $86,000, and in July 1994,
Collagen purchased 104,762 shares of Cohesion Corporation Preferred Stock for
approximately $94,000. Cohesion Corporation was formerly known as Otogen
Corporation ("Otogen") and Dr. Rodney Perkins, a director of Collagen at that
time, was the majority stockholder, Chairman and President. In addition to the
purchase of shares, Collagen granted to Cohesion Corporation a license to use
the Company's technology in the fields of otology and neurosurgical
applications, in return for which Collagen was granted an additional 50,000
shares of Cohesion Corporation Common Stock. Between April 1994 and May 1996,
Collagen made an additional equity investment in Cohesion Corporation of
$180,000 and loaned to Cohesion Corporation an aggregate of approximately
$1,540,000. In May 1996, Collagen purchased an additional aggregate of 875,000
shares of Cohesion Corporation Common Stock and Cohesion Corporation Preferred
Stock from Cohesion Corporation for an aggregate of approximately $5.1 million
(including conversion of Cohesion Corporation's outstanding indebtedness to
Collagen) and purchased 275,000 shares of Cohesion Corporation Common Stock and
Cohesion Corporation Preferred Stock from Dr. Perkins for an aggregate of
$1,452,500. Collagen also granted to Cohesion Corporation a license to use
certain of Collagen's technology in the fields of tissue adhesion and
anti-adhesion technology, excluding ophthalmic applications, in return for which
Collagen was granted an additional 75,000 shares of Cohesion Corporation
Preferred Stock. In addition, Collagen agreed to loan Cohesion Corporation up to
$5,000,000 in the form of convertible debt, which loan drawn upon at the
direction of the President of Cohesion Corporation, bore interest at an annual
rate of the greater of the prime lending rate or 10% and was due and payable
five years after the date of the first disbursement, subject to acceleration
under certain circumstances. In connection with the loan transaction, Dr.
Perkins granted Collagen an option to purchase up to 125,000 additional shares
of Cohesion Corporation Common Stock held by Dr. Perkins, which option became
exercisable as to 25,000 shares for each $1,000,000 of the loan commitment that
was disbursed. In each of May 1997, August 1997 and October 1997 Collagen loaned
$1,000,000 to Cohesion Corporation under the loan commitment and purchased
25,000 shares of Cohesion Corporation Common Stock from Dr. Perkins. In
addition, in connection with this transaction, Collagen agreed to grant Dr.
Perkins an option to purchase up to 77,500 shares of Collagen Common Stock in
connection with his continued participation on the Cohesion Corporation Board of
Directors. In connection with the May 1996 stock purchase transactions, Craig W.
Johnson, a director and Secretary of Collagen, and an investment partnership in
which he holds a beneficial interest purchased an aggregate of 25,000 shares of
Cohesion Corporation Common Stock and Cohesion Corporation Preferred Stock for
an aggregate of
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<PAGE> 76
$127,750. In June 1996, Dr. John R. Daniels, a director of Collagen, was
appointed to Cohesion Corporation's Board of Directors. As of June 30, 1997,
Collagen held an 81% equity interest in Cohesion Corporation, and in December
1997 increased its ownership position to 99%. Effective January 1, 1998,
Collagen contributed all of its holdings of Cohesion Corporation capital stock
and its research and development programs for sealant and adhesion barriers to
the Company.
Innovasive Devices, Inc.
In October 1995, Collagen purchased 844,000 shares of preferred stock of
Innovasive for $4,100,000. In connection with this investment, Collagen entered
into Research and Development, Distribution and Manufacturing and Supply
Agreements with Innovasive with respect to tissue fixation devices manufactured
from collagen-based materials using Collagen's proprietary technology. Shortly
following its investment in Innovasive, Collagen purchased from Howard D.
Palefsky, the former Chairman and Chief Executive Officer of Collagen, all of
his holdings of Innovasive capital stock (30,303 shares) for an aggregate of
$63,552. During fiscal 1997, pursuant to the terms of the Research and
Development Agreement, Innovasive made payments to Collagen totaling $698,665
for research and development services and reimbursement of expenses paid by
Collagen. As of June 30, 1997, Innovasive owed Collagen $289,243 for research
and development services and the reimbursement of expenses paid by Collagen.
Collagen is entitled to elect one member of Innovasive's Board of Directors so
long as it holds five percent of Innovasive's capital stock on a fully diluted
basis. Mr. Foster is Collagen's current designee on the Innovasive Board of
Directors. As of December 31, 1997, Collagen held approximately nine percent of
Innovasive's outstanding capital stock. In connection with the Distribution, all
outstanding shares of Innovasive owned by Collagen and all agreements between
Collagen and Innovasive were transferred to the Company.
Outside Legal Counsel
Since February 1993, Collagen has retained as its principal outside legal
counsel Venture Law Group, A Professional Corporation, a law firm of which Craig
W. Johnson, a director of Collagen, is a director. Prior to such time, Collagen
had retained Wilson, Sonsini, Goodrich & Rosati, Professional Corporation
("WSG&R"), as its principal outside legal counsel since 1977. From 1980 until
February 1993, Mr. Johnson was a member of WSG&R. In connection with the
Distribution, Mr. Johnson, who has been elected to the Company's Board, will
resign from Collagen's Board.
Executive Officers and Directors
In October 1995, Ross Erickson, then an executive officer of Collagen and
currently an executive officer of the Company, borrowed $120,000 from Collagen
pursuant to a secured promissory note. This debt was secured by real property
purchased by Mr. Erickson and all shares of Collagen's stock issued to Mr.
Erickson pursuant to the exercise of stock options. In May 1997, all amounts due
to Collagen under such loan were repaid through the assumption of the loan by
Cohesion Corporation. In October 1997 and December 1997 Ross Erickson repaid to
Cohesion Corporation all amounts owing on such promissory note.
In August 1994, June 1995 and December 1995, Mr. Palefsky borrowed an
aggregate of $475,000 from Collagen pursuant to promissory notes secured by all
shares of Collagen's capital stock held by Mr. Palefsky while such debt is
outstanding, and bearing an annual interest rate equal to the lesser of 10% or
the prime rate at the close of each quarter for which interest accrues. In
February 1996, Mr. Palefsky borrowed an additional $1,080,000 from Collagen on
an unsecured basis pursuant to a promissory note bearing an annual interest rate
equal to the lesser of 10% or the prime rate at the close of each quarter for
which interest accrues.
In March 1997, Mr. Palefsky entered into an agreement with Collagen in
connection with the severance of his employment relationship with Collagen. At
the same time, Mr. Palefsky entered into a consulting relationship with
Collagen, which has been assigned to the Company pursuant to the Separation and
Distribution Agreement. Under the consulting agreement, Collagen agreed to pay
Mr. Palefsky a consulting fee of $29,167 during each of the first 24 months of
his consultancy. As additional compensation for services during his consultancy
and for Mr. Palefsky's execution and adherence to a noncompetition agreement
with
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Collagen, Collagen agreed to: (i) pay Mr. Palefsky a bonus of $650,000, (ii)
conditioned on completion of the first year of his consultancy and
noncompetition, pay Mr. Palefsky a bonus of $225,000 on the first anniversary
date of the agreement and forgive $425,000 of the principal and any accrued
interest thereon of outstanding loans totaling $475,000 in principal amount,
made to Mr. Palefsky by Collagen and (iii) conditioned on completion of the
second year of Mr. Palefsky's consultancy, Collagen agreed to forgive the
balance of the principal and any accrued interest thereon of the above loans and
also to forgive the entire principal balance and any accrued interest thereon of
the loan in the principal amount of $1,080,000 made by Collagen in February 1996
to Mr. Palefsky. During his consultancy, Mr. Palefsky is also entitled to
reimbursement for his reasonable expenses incurred in connection with rendering
consulting services to Collagen. Mr. Palefsky's options to purchase stock of
Collagen will continue to vest during his period of consultancy and shall, in
any event, be fully vested on conclusion of the consultancy.
In July 1996, Reid W. Dennis, Chairman Emeritus and a director of Collagen
and a director of the Company, borrowed $1,000,000 from Collagen on an unsecured
basis pursuant to a promissory note bearing an annual interest rate of 8.25%.
Mr. Dennis repaid the entire balance of principal and accrued interest on this
note in September 1996.
In December 1997, Charles Williams, Vice President, Operations of the
Company, borrowed $150,000 from Cohesion Corporation, pursuant to a promissory
note bearing an annual interest rate of 8.5%, secured by certain real property
owned by Mr. Williams and all shares of Cohesion Corporation Common Stock issued
to Mr. Williams upon exercise of stock options currently held or acquired
following the date of the loan by Mr. Williams while the loan amount is
outstanding.
Change of Control Agreements
The Company and Collagen entered into certain "change of control"
agreements with certain of the Company's executive officers pursuant to which
all options granted to such executive officers to purchase Collagen Common Stock
shall immediately vest to the extent that such options would have vested during
the 24 months following the termination date, and all options granted to such
executive officers to purchase Common Stock of Cohesion Corporation, a
majority-owned subsidiary of the Company, shall immediately vest to the extent
that such options would have vested during the 24 months following the change of
control, in the event that such officer's employment is involuntarily terminated
without cause within a specified period of time following a change of control of
the Company or Collagen. Events constituting a change of control include (i) any
person acquiring 50% or more of the total voting power represented by the
Company's then outstanding voting securities without the approval of the
Company's Board; (ii) any person acquiring 50% or more of the total voting power
represented by Collagen's then outstanding voting securities without the
approval of Collagen's Board; (iii) any merger, sale of assets or liquidation of
the Company in which the Company's outstanding voting securities prior to the
transaction cease to represent at least 50% of the total voting power
represented by the voting securities of the Company or of the surviving entity
after the transaction; (iv) any merger, sale of assets or liquidation of
Collagen in which Collagen's outstanding voting securities prior to the
transaction cease to represent at least 50% of the total voting power
represented by the voting securities of Collagen or of the surviving entity
after the transaction; (v) replacing a majority of the Company's Board; or (vi)
replacing a majority of Collagen's Board. The change of control agreements will
expire by their own terms on the Distribution Date.
DESCRIPTION OF CAPITAL STOCK
Upon the completion of the Distribution, the authorized capital stock of
the Company will consist of 15,000,000 shares of Common Stock, $0.001 par value,
and 5,000,000 shares of Preferred Stock, $0.001 par value. The description set
forth below is incomplete and qualified by reference to the Company's Amended
and Restated Certificate of Incorporation and Bylaws, filed as exhibits to the
Company's Registration Statement on Form 10.
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COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferential rights with respect to any outstanding Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See
"-- Dividend Policy." In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and satisfaction of preferential
rights of any outstanding Preferred Stock. The Common Stock has no preemptive or
conversion rights or other subscription rights. As of June 25, 1998, 8,861,034
shares of Common Stock were outstanding. Such shares of Common Stock will be
distributed by the sole stockholder, Collagen, upon completion of the
Distribution and will be at that time fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized to issue Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders. There are currently no
shares of Preferred Stock outstanding.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
stockholders. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the voting power of the holders of Common Stock, including
voting rights, of the holders of Common Stock. In certain circumstances, such
issuance could have the effect of decreasing the market price of the Common
Stock. The Company currently has no plans to issue any additional shares of
Preferred Stock.
DISTRIBUTION AGENT; TRANSFER AGENT AND REGISTRAR
The Distribution Agent and Transfer Agent and Registrar for the Common
Stock is Bank of New York, N.A. The Distribution Agent and Transfer Agent's
telephone number is (212) 815-6955.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company's Amended and Restated Certificate and its Bylaws will, after
the Distribution, provide, among other things, that any action required or
permitted to be taken by the stockholders of the Company may be taken only at a
duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. In addition, special meetings of the
stockholders of the Company may be called only by the Board of Directors, the
Chairman of the Board, the President of the Company or by any person or persons
holding shares representing at least 10% of the outstanding capital stock. The
Bylaws also establish procedures, including advance notice procedures with
regard to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors.
The Company is subject to the provisions of Section 203 of the Delaware
law, an anti-takeover law. In general, the statue prohibits a publicly held
Delaware corporation from entering into a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The foregoing provisions could have the effect of making it more difficult
for a third party to effect a change in the control of the Board of Directors.
In addition, these provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, a
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majority of the outstanding voting stock of the Company. See "Risk
Factors -- Potential Adverse Effect of Anti-Takeover Provisions."
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form 10 (the "Registration Statement,"
which term shall include any amendments thereto) under the Exchange Act. This
Information Statement, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain items of which are contained in exhibits to the Registration Statement
as permitted by the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement, including the
exhibits thereto, and the financial statements and notes filed as a part
thereof. Statements made in this Registration Statement concerning the contents
of any document referred to herein are not necessarily complete. With respect to
each such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement, including exhibits thereto and
the financial statements and notes filed as a part thereof, as well as such
reports and other information filed with the Commission, may be inspected
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices
of the Commission located at Seven World Trade Center, 13th Floor, New York, NY
10048, and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Commission upon payment of certain fees prescribed by the Commission. Such
reports and other information may also be inspected without charge at a Web site
maintained by the Commission. The address of such site is http://www.sec.gov.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
By: /s/ DAVID FOSTER
------------------------------------
David Foster
Chief Executive Officer
Cohesion Technologies, Inc.
Date: June 25, 1998
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER NOTES DESCRIPTION
- ------- ------- ------------------------------------------------------------
<C> <S> <C>
2.1 (2)(12) Separation and Distribution Agreement dated January 1, 1998,
between the Company and Collagen Corporation.
3.1 Amended and Restated Certificate of Incorporation of the
Company.
3.2 Bylaws of the Company.
4.1 Specimen Stock Certificate.
10.1 (2)(13) Collagraft Supply Agreement dated January 1, 1998, between
the Company and Collagen Corporation.
10.2 (2)(14) Collagen Supply Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.3 (2)(15) Assignment and License Agreement dated January 1, 1998,
between the Company and Collagen Corporation.
10.4 (2)(16) Recombinant Technology Development and License Agreement
dated January 1, 1998, between the Company and Collagen
Corporation.
10.5 (17) Services Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.6 (18) Benefits Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.7 (19) Tax Allocation and Indemnity Agreement dated January 1,
1998, between the Company and Collagen Corporation.
10.8 (2)(20) Vitrogen International Distribution Agreement dated January
1, 1998, between the Company and Collagen Corporation.
10.9 (2) Letter Agreement dated October 1, 1996 between Collagen
Corporation and Genotypes, Inc.
10.10 (11) Form of Indemnification Agreement between the Company and
each of its Officers and Directors.
10.11 (11) 1998 Stock Option Plan.
10.12 (11) 1998 Employee Stock Purchase Plan.
10.13 (11) 1998 Directors' Stock Option Plan.
10.14 (3) Collaborative Research and Distribution Agreement between
Collagen Corporation and Zimmer, Inc. dated as of June 26,
1985.
10.15 (4) Amendments dated February 16, 1993 and February 18, 1993
respectively, to the Product Development and Distribution
Agreement dated January 18, 1985 by and between Collagen
Corporation and Zimmer, Inc.
10.16 (5) Lease Agreement dated June 1, 1992 by and between Collagen
Corporation and Harbor Investment Partners.
10.17 (6) Lease Renewal for 2500 Faber Place, Palo Alto, dated
December 1, 1992 between Collagen Corporation and Leonard
Ely, Shirley Ely, Carl Carlsen and Mary Carlsen.
10.18 (2) Amended and Restated Research, Lease and Supply Agreement
dated as of February 20, 1996 between Collagen Corporation
and Pharming B.V.
10.19 (2) Research and Development Agreement dated October 17, 1995
between Collagen Corporation and Innovasive Devices, Inc.
10.20 (2) Manufacturing and Supply Agreement dated as of October 17,
1995 between Collagen Corporation and Innovasive Devices,
Inc.
10.21 (2) Distribution Agreement dated as of October 17, 1995 between
Collagen Corporation and Innovasive Devices, Inc.
10.22 (7) Promissory Note between Howard D. Palefsky and the
Registrant dated February 20, 1996.
10.23 (8)(11) Amended and Restated Secured Loan Agreement between Ross R.
Erickson and Collagen Corporation dated December 31, 1995.
10.24 (9) Loan Agreement between Collagen Corporation and Cohesion
Corporation dated May 24, 1996.
10.25 (10) Agreement between Howard D. Palefsky and Collagen
Corporation dated March 15, 1997.
</TABLE>
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<TABLE>
<CAPTION>
NUMBER NOTES DESCRIPTION
- ------- ------- ------------------------------------------------------------
<C> <S> <C>
10.26 (11) Form of Management Continuity Agreement between certain
officers of the Company and Collagen Corporation dated
February 7, 1997.
10.27 (2) Intellectual Property and Production Agreement between
Genotypes and Collagen Corporation dated August 15, 1996.
10.28 (11) Secured Loan Agreement between Charles Williams and Cohesion
Corporation dated December 15, 1997.
21.1 * List of Subsidiaries (none).
27.1 * Financial Data Schedule.
</TABLE>
- ---------------
(1) To be supplied by amendment.
(2) Confidential treatment has been or will be requested as to certain portions
of this Exhibit.
(3) Incorporated by reference to Exhibit 10.24 filed with Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1985.
(4) Incorporated by reference to Exhibit 10.60 filed with Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1993.
(5) Incorporated by reference to Exhibit 10.56 filed with Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1992.
(6) Incorporated by reference to Exhibit 10.63 of Collagen Corporation's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994.
(7) Incorporated by reference to Exhibit 10.79 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996.
(8) Incorporated by reference to Exhibit 10.76 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
1995.
(9) Incorporated by reference to Exhibit 10.82 of Collagen Corporation's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996.
(10) Incorporated by reference to Exhibit 10.88 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997.
(11) Management contract or compensatory plan or arrangement.
(12) Incorporated by reference to Exhibit 2.1 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(13) Incorporated by reference to Exhibit 10.104 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(14) Incorporated by reference to Exhibit 10.97 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(15) Incorporated by reference to Exhibit 10.103 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(16) Incorporated by reference to Exhibit 10.98 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(17) Incorporated by reference to Exhibit 10.100 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(18) Incorporated by reference to Exhibit 10.101 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(19) Incorporated by reference to Exhibit 10.99 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(20) Incorporated by reference to Exhibit 10.102 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
* Previously filed.
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APPENDIX A
LEHMAN BROTHERS
April 16, 1998
Board of Directors
Collagen Corporation
2500 Faber Place
Palo Alto, California 94303
Members of the Board:
We understand that Collagen Corporation (the "Company") is proposing to
distribute all of the stock of Cohesion Technologies, Inc. ("Cohesion") to the
Company's stockholders on a pro rata basis so that stockholders of the Company
will receive one share of common stock of Cohesion for each share of common
stock of the Company owned by such stockholder (the "Distribution"). The terms
and conditions of the Distribution are set forth in more detail in the Company's
preliminary proxy statement (the "Proxy Statement").
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's stockholders of the Distribution. We have not been requested to opine
as to, and our opinion does not in any manner address, the Company's underlying
business decision to proceed with or effect the Distribution.
In arriving at our opinion, we reviewed and analyzed: (1) the specific
terms of the Distribution, (2) the Proxy Statement, the Company's annual report
on Form 10-K for the year ended June 30, 1997 and such other publicly available
information concerning the Company that we believe to be relevant to our
analysis, (3) financial and operating information with respect to the business,
operations and prospects of the Company and Cohesion furnished to us by the
Company, (4) a trading history of the Company's common stock and a comparison of
that trading history with those of other companies that we deemed relevant, (5)
a comparison of the historical financial results and present financial condition
of the Company with those of other companies that we deemed relevant, and (6) a
comparison of the historical financial results and present financial condition
of Cohesion with those of other companies that we deemed relevant. In addition,
we have had discussions with the management of the Company concerning the
businesses, operations, assets, financial conditions and prospects of the
Company (including on a pro forma basis) and Cohesion and have undertaken such
other studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of the
Company and Cohesion, following the Distribution, upon advice of the Company we
have assumed that such projections have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the Company
and Cohesion and that the Company and Cohesion will perform substantially in
accordance with such projections. In arriving at our opinion, we have not
conducted a physical inspection of the properties and facilities of the Company
or Cohesion and have not made or obtained any evaluations or appraisals of the
assets or liabilities of the Company or Cohesion. In addition, you have not
authorized us to solicit, and we have not solicited, any indications of interest
from any third party with respect to the purchase of all or a part of the
business of Cohesion. We have assumed that the Distribution will be a tax-free
transaction to the stockholders of the Company. Our opinion necessarily is based
upon market, economic and other conditions as they exist on, and can be
evaluated as of, the date of this letter.
<PAGE> 84
The process by which securities trading markets establish a market price
for any security is complex, involving the interaction of numerous factors, and
market prices will fluctuate with changes in, among other factors, the financial
condition, business and prospects of the issuer and comparable companies and
economic and financial market conditions. In addition, trading in shares of
Cohesion will likely be characterized by a period of redistribution among
stockholders of the Company who receive such shares in the Distribution, which
may temporarily depress the market price of such shares during such period.
Accordingly, we express no opinion as to the prices at which shares of common
stock of Cohesion or the Company actually will trade following the consummation
of the Distribution. This opinion should not be viewed as providing any
assurances that the combined market value of the shares of common stock of the
Company after consummation of the Distribution and the shares of the common
stock of Cohesion to be received by a stockholder of the Company pursuant to the
Distribution will be in excess of the market value of the shares of common stock
of the Company owned by such stockholder at any time prior to announcement or
consummation of the Distribution.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Distribution is fair to
such stockholders.
We have acted as financial advisor to the Company in connection with the
Distribution and will receive a fee for our services which is contingent upon
the consummation of the Distribution. In addition, the Company has agreed to
indemnify us for certain liabilities that may arise out of the rendering of this
opinion. We also have performed various investment banking services for the
Company in the past and have received customary fees for such services. In the
ordinary course of our business, we may actively trade in the equity securities
of the Company for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Distribution. This opinion is not intended to be and does
not constitute a recommendation to any stockholder of the Company as to (i) how
such stockholder should vote with respect to the Distribution or (ii) any action
or investment decision which may be taken by such stockholders with respect to
shares of common stock of the company and Cohesion owned or to be received by
them in the Distribution.
Very truly yours,
LEHMAN BROTHERS
By: /s/ TED BRECK
------------------------------------
Managing Director
2
<PAGE> 85
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COHESION TECHNOLOGIES, INC. CONSOLIDATED FINANCIAL
STATEMENTS:
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997 and
March 31, 1998............................................ F-3
Consolidated Statements of Operations for the years ended
June 30, 1995, 1996 and 1997 and the nine months ended
March 31, 1997 and 1998................................... F-4
Consolidated Statements of Stockholder's and Parent Company
Equity (Net Capital Deficiency) for the years ended June
30, 1995, 1996 and 1997 and the nine months ended March
31, 1998.................................................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1995, 1996 and 1997 and the nine months ended
March 31, 1997 and 1998................................... F-6
Notes to Consolidated Financial Statements.................. F-7
COHESION TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION:
Description of Unaudited Pro forma Consolidated Financial
Information............................................... F-24
Unaudited Pro forma Consolidated Balance Sheet as of March
31, 1998.................................................. F-25
Unaudited Pro forma Consolidated Statements of Operations
for the year ended June 30, 1997 and the nine months ended
March 31, 1998............................................ F-26
Notes to Unaudited Pro forma Consolidated Financial
Information............................................... F-27
</TABLE>
F-1
<PAGE> 86
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Cohesion Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Cohesion
Technologies, Inc. ("Cohesion"), (a wholly-owned subsidiary of Collagen
Corporation), as described in Note 1 to the consolidated financial statements,
as of June 30, 1996 and 1997, and the related consolidated statements of
operations, stockholder's and parent company equity (net capital deficiency) and
cash flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of Cohesion's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cohesion at
June 30, 1996 and 1997, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
March 6, 1998
F-2
<PAGE> 87
COHESION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
------------------- MARCH 31,
1996 1997 1998
------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $11,074 $ 13,706 $ 3,632
Short-term investments.................................... -- 92 16
Accounts receivable, less allowance for doubtful accounts
($14 at June 30, 1996, $2 at June 30, 1997, $3 at March
31, 1998)............................................... 532 97 183
Inventories............................................... 56 56 39
Current deferred taxes.................................... 3,618 2,608 875
Receivable due from sales of Boston Scientific Corporation
stock................................................... 1,866 -- --
Other current assets...................................... 1,840 942 449
------- -------- -------
Total current assets............................... 18,986 17,501 5,194
Property and equipment, net................................. 1,537 1,566 2,004
Intangible assets, net...................................... 1,850 1,491 1,375
Investment in Boston Scientific Corporation (Target
Therapeutics, Inc. in 1996)............................... 65,841 83,874 75,455
Other investments........................................... 7,771 10,041 9,854
Long-term deferred taxes.................................... 35 33 1,396
Loans to officers and employees............................. 1,807 9 199
Other assets................................................ 89 89 100
------- -------- -------
$97,916 $114,604 $95,577
======= ======== =======
LIABILITIES AND STOCKHOLDER'S AND PARENT COMPANY EQUITY
Current liabilities:
Accounts payable.......................................... $ 586 $ 627 $ 449
Accrued compensation...................................... 352 625 945
Accrued liabilities....................................... 2,293 1,516 1,870
Income taxes payable...................................... 2,292 2,700 300
Notes payable............................................. 5,000 -- --
Payable to Collagen....................................... -- -- 317
------- -------- -------
Total current liabilities.......................... 10,523 5,468 3,881
Long-term liabilities:
Deferred income taxes..................................... 27,091 35,052 32,087
Other long-term liabilities............................... 169 79 36
------- -------- -------
Total long-term liabilities........................ 27,260 35,131 32,123
Commitments and contingencies
Minority interest........................................... 588 -- --
Stockholder's and parent company equity:
Preferred stock, $.001 par value, authorized: 5,000,000
shares, issued and outstanding: 10 shares at June 30,
1997 and March 31, 1998 (no shares at June 30, 1996).... -- -- --
Common stock, $.001 par value, authorized: 10,000,000
shares, issued and outstanding: no shares at June 30,
1996 and 1997 and March 31, 1998........................ -- -- --
Additional paid-in capital................................ 9,621 9,621 9,621
Parent company equity..................................... 15,375 17,315 7,146
Unrealized gain on available-for-sale investments......... 34,549 47,069 42,806
------- -------- -------
Total stockholder's and parent company equity...... 59,545 74,005 59,573
------- -------- -------
$97,916 $114,604 $95,577
======= ======== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE> 88
COHESION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------ --------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue -- product sales.............. $ 3,546 $ 3,612 $ 2,527 $ 2,075 $ 1,472
Costs and expenses:
Cost of sales....................... 1,961 2,404 2,105 1,902 816
Research and development............ 3,416 4,268 9,627 6,634 11,309
General and administrative.......... 2,726 3,120 7,153 5,245 3,820
Purchased in-process research and
development...................... -- 3,000 -- -- 10,530
------- ------- -------- -------- --------
Total costs and expenses.... 8,103 12,792 18,885 13,781 26,475
------- ------- -------- -------- --------
Loss from operations.................. (4,557) (9,180) (16,358) (11,706) (25,003)
Other income (expense):
Net gain on investments, principally
Boston Scientific Corporation
(Target Therapeutics, Inc. in
1995 and 1996)................... 5,110 82,093 9,063 9,222 13,739
Net gain on sale of investment in
Prograft Medical, Inc............ -- -- 15,395 -- --
Equity in earnings of Target
Therapeutics, Inc................ 2,417 1,430 -- -- --
Equity in losses of other
affiliates....................... (1,230) (1,824) (813) (730) (9)
Interest income..................... 25 378 566 386 262
Interest expense.................... (2,113) (2,532) (377) (288) --
------- ------- -------- -------- --------
Income (loss) before provision for
income taxes and minority
interest............................ (348) 70,365 7,476 (3,116) (11,011)
Provision for income taxes............ 553 31,718 3,162 -- --
Minority interest..................... -- (27) (667) (391) --
------- ------- -------- -------- --------
Net income (loss)..................... $ (901) $38,674 $ 4,981 $ (2,725) $(11,011)
======= ======= ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
<PAGE> 89
COHESION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S AND PARENT COMPANY EQUITY (NET CAPITAL
DEFICIENCY)
YEARS ENDED JUNE 30, 1995, 1996, 1997
AND NINE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
STOCK-
UNREALIZED HOLDER'S AND
GAIN/(LOSS) PARENT
PREFERRED ON COMPANY
AND ADDITIONAL PARENT AVAILABLE- EQUITY
COMMON PAID-IN COMPANY FOR-SALE (NET CAPITAL
STOCK CAPITAL EQUITY INVESTMENTS DEFICIENCY)
--------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994........... $ -- $9,621 $(15,353) $ -- $ (5,732)
Other advances to Collagen
Corporation...................... -- -- (1,927) -- (1,927)
Net loss........................... -- -- (901) -- (901)
------ ------ -------- -------- --------
Balance at June 30, 1995........... -- 9,621 (18,181) -- (8,560)
Other advances to Collagen
Corporation...................... -- -- (5,118) -- (5,118)
Unrealized gain on
available-for-sale securities.... -- -- -- 34,549 34,549
Net income......................... -- -- 38,674 -- 38,674
------ ------ -------- -------- --------
Balance at June 30, 1996........... -- 9,621 15,375 34,549 59,545
Other advances to Collagen
Corporation...................... -- -- (3,041) -- (3,041)
Unrealized gain on
available-for-sale securities.... -- -- -- 12,520 12,520
Net income......................... -- -- 4,981 -- 4,981
------ ------ -------- -------- --------
Balance at June 30, 1997........... -- 9,621 17,315 47,069 74,005
Other advances from Collagen
Corporation (unaudited).......... -- -- 842 -- 842
Unrealized loss on
available-for-sale securities
(unaudited)...................... -- -- -- (4,263) (4,263)
Net loss (unaudited)............... -- -- (11,011) -- (11,011)
------ ------ -------- -------- --------
Balance at March 31, 1998
(unaudited)...................... $ -- $9,621 $ 7,146 $ 42,806 $ 59,573
====== ====== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5
<PAGE> 90
COHESION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ (901) $ 38,674 $ 4,981 $(2,725) $(11,011)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Purchased in-process research
and development........................ -- 3,000 -- -- 10,530
Depreciation and amortization............ 568 801 564 479 514
Equity in (earnings) losses of
affiliates............................. (1,188) 393 813 730 9
Gains on investments, net................ (2,952) (42,547) (13,625) (4,051) (13,739)
Deferred income taxes.................... 844 (7,508) 326 -- 1,436
Decrease (increase) in assets:
Accounts receivable.................... 415 188 435 32 (86)
Inventories............................ (17) (37) -- 31 17
Other.................................. (150) (1,331) 1,166 (239) 398
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities
and other........................... 577 1,177 (463) (499) 496
Income taxes payable................... 444 78 408 (1,992) (2,400)
Other long-term liabilities............ (4) 611 (679) (394) (43)
------- -------- -------- ------- --------
Total adjustments........................... (1,463) (45,175) (11,055) (5,903) (2,868)
------- -------- -------- ------- --------
Net cash used in operating activities.... (2,364) (6,501) (6,074) (8,628) (13,879)
------- -------- -------- ------- --------
Cash flows from investing activities:
Net proceeds from sales of Boston Scientific
Corporation/Target Therapeutics, Inc.
stock.................................... 6,221 57,950 5,578 5,578 14,716
Net proceeds from sales of other affiliate
stock.................................... -- 1,447 9,771 -- 704
Proceeds from sales and maturities of
short-term investments................... -- -- -- -- 75
Purchases of short-term investments......... -- -- -- -- --
Expenditures for property and equipment..... (1,311) (678) (532) (196) (510)
Increase in intangible and other assets..... (416) (2,042) (824) (14) --
Equity investments and loans to
affiliates............................... (5,737) (14,337) (287) (251) (650)
Acquisition of shares of Cohesion
Corporation, net of cash balances........ -- (1,256) -- -- (10,530)
------- -------- -------- ------- --------
Net cash provided by (used in) investing
activities............................. (1,243) 41,084 13,706 5,117 3,805
------- -------- -------- ------- --------
Cash flows from financing activities:
Proceeds from (repayments of) bank
borrowings............................... -- 5,000 (5,000) -- --
Proceeds from (repayments of) advances from
Collagen Corporation..................... 3,600 (29,000) -- -- --
------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities............................. 3,600 (24,000) (5,000) -- --
------- -------- -------- ------- --------
Net increase (decrease) in cash and
cash equivalents............................ (7) 10,583 2,632 (3,511) (10,074)
Cash and cash equivalents at beginning of
period...................................... 498 491 11,074 11,074 13,706
------- -------- -------- ------- --------
Cash and cash equivalents at end of period.... $ 491 $ 11,074 $ 13,706 $ 7,563 $ 3,632
======= ======== ======== ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
<PAGE> 91
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Cohesion Technologies, Inc. ("Cohesion") was organized as a Delaware
corporation and a wholly-owned subsidiary of Collagen Corporation ("Collagen")
in June 1997. In October 1997, Collagen announced that it would proceed to
separate its Aesthetic Technologies Group and its Collagen Technologies Group
("CTG") into two independent, publicly-traded companies. In connection with the
separation, Collagen plans to distribute as a dividend to its stockholders, one
share of Cohesion common stock for each share of Collagen common stock
outstanding, (the "Distribution"). The Distribution is designed to separate two
distinct businesses with significant differences in their markets, products,
research needs, investment needs, employee retention and compensation plans and
plans for growth. Collagen's Board believes the separation into two independent
companies will enhance the ability of each to focus on strategic initiatives and
new business opportunities, improve cost structures and operating efficiencies
and create incentives that are more attractive and appropriate for the
recruitment and retention of key employees. As a consequence, Collagen believes
that investors will be able to evaluate better the merits of the two groups of
businesses and their future prospects.
In March 1998, the Board of Directors of Collagen approved certain
agreements between Cohesion and Collagen which (i) provided for the transfer,
effective January 1, 1998, of certain assets and liabilities relating to the
businesses previously conducted by Collagen's CTG to Cohesion, and (ii)
established contractual arrangements between Collagen and Cohesion described
below under Note 2. CTG's business activities focused on the design,
development, manufacture and commercialization of innovative resorbable
biomaterials, adhesive technologies, and delivery systems in the fields of
tissue repair and regeneration.
The accompanying consolidated financial statements have been prepared using
Collagen's historical cost basis of the assets and liabilities of the various
division activities that comprise Cohesion. The financial statements of Cohesion
include the operating results of Cohesion Corporation, a developer of
proprietary products for hemostasis and tissue adhesion, biosealants and
adhesion barriers for surgical applications, since the acquisition of Cohesion
Corporation by Collagen in fiscal 1996 (see Note 7, "Acquisitions of Cohesion
Corporation").
The consolidated financial statements reflect the results of operations,
financial condition and cash flows of Cohesion as a component of Collagen and
may not be indicative of the actual results of operations and financial position
of Cohesion under separate ownership. The various assets, liabilities, revenues
and expenses associated with CTG have been allocated to the historical financial
statements of Cohesion in a manner consistent with the Assignment and License
Agreement, and related agreements, discussed below. Management believes that the
consolidated statements of operations include a reasonable allocation of costs
incurred by Collagen which benefit Cohesion. These allocations of corporate
expenses include, in aggregate, approximately 30% to 35% of the general and
administrative expenses of Collagen for the periods presented with the exception
of certain Chief Executive Officer ("CEO") expenses and legal costs related to
Collagen's lawsuit with Matrix Pharmaceutical, Inc. ("Matrix"). (See Notes 1, 8
and 9.) The CEO expenses have been allocated to Cohesion based on the CEO's
level of involvement in Cohesion during each fiscal year presented. All costs
associated with the Matrix lawsuit, which was filed in December 1994 and settled
in May 1997, were allocated based on the focus of the lawsuit during fiscal
1995, 1996 and 1997. Costs and expenses associated with cost of sales and
research and development were generally allocated to Cohesion on a specific
identification basis.
The consolidated financial statements include an allocation of Collagen
corporate debt and interest expense. In connection with the asset transfer
discussed above, $10.9 million of cash, cash equivalents and
F-7
<PAGE> 92
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
short-term investments remained with Collagen and the remaining cash, cash
equivalents and short-term investments were transferred to Cohesion at December
31, 1997. Each debt security was allocated between the companies pro rata to the
total allocation of such investments. All short-term investments for fiscal
years 1997 and prior were allocated to Collagen. Substantially all investments
in affiliates, including Boston Scientific Corporation of Natick, Massachusetts
("Boston Scientific") and Innovasive Devices, Inc. of Marlborough, Massachusetts
("Innovasive Devices") were allocated to Cohesion. Trade receivables, notes
receivable, loans to officers and employees, fixed assets and employee related
liabilities were allocated based on specific identification. All equity
accounts, with the exception of the additional-paid-in-capital related to Target
Therapeutics, Inc., remained with Collagen. For any assets or liabilities where
it was not practical to use the specific identification method, Cohesion was
allocated 30% of these assets and liabilities. The 30% allocation was based on a
review of the characteristics and activity of these assets and liabilities and
business objectives. In those years that Cohesion had negative cash and cash
equivalent balances, a note payable due to Collagen was recorded. Accordingly,
interest expense was accrued annually at 8% and Cohesion was assumed to have
repaid the note payable balance and the accrued interest the following June
30th. The intercompany receivable/payable balances resulting from Cohesion's
participation in Collagen's central cash management system, after consideration
of the December 31, 1997 contribution of cash, cash equivalents and short-term
investments, is a component of parent company's contributed capital on
Cohesion's balance sheet. The officer separation agreement with Collagen's
former CEO, as described below under Note 8, and the costs associated with the
agreement have been allocated to Cohesion.
Under the terms of the Services and Supply agreements between Cohesion and
Collagen discussed below, Collagen will supply certain products to Cohesion for
a fee. The cost of sales amounts included in the financial statements are based
on historical costs for the periods presented. The intercompany agreements
discussed in Note 2 provide for cost to be determined on a defined formula. If
such prospective arrangements had been in place during the periods presented,
cost of sales would have increased $167,000 in fiscal year 1995, decreased by
$237,000 and $589,000 in fiscal years 1996 and 1997, respectively, and would
have increased by $48,000 in the nine months ended March 31, 1998.
Under the terms of the Recombinant Technology and Development License
agreement between Cohesion and Collagen discussed below, Cohesion and Collagen
will collaborate to develop recombinant human collagen and provide for cost
sharing of the project until certain milestones are met. The research and
development ("R&D") expenses included in the financial statements are based on
historical costs for the periods presented. The intercompany agreements
discussed in Note 2 provide for costs to be equally shared. If such prospective
arrangements had been in place during the periods presented, R&D expenses, net
of reimbursements from Collagen, would have decreased by $273,000, $703,000 and
$1.3 million in fiscal years 1995, 1996 and 1997 and $1.0 million in the nine
months ended March 31, 1998, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of Cohesion and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Cohesion operates in one
industry segment focusing on the development and sale of medical devices.
Investments in unconsolidated subsidiaries, and other equity investments in
which Cohesion has a 20% to 50% interest or otherwise has the ability to
exercise significant influence, are accounted for under the equity method.
F-8
<PAGE> 93
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interim Financial Information
The financial information at March 31, 1998, and for the nine months ended
March 31, 1997 and 1998, is unaudited but includes all adjustments (consisting
only of normal recurring adjustments) which Cohesion considers necessary for a
fair presentation of the financial position at such date and of the operating
results and cash flows for those periods. Results of these periods are not
necessarily indicative of results expected for the entire year.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents, Short-term Investments and Other Investments
Cohesion considers all highly liquid investments with an original maturity
from date of purchase of three months or less to be cash equivalents. Short-term
investments consist principally of bankers acceptances, commercial paper and
master notes and have maturities greater than 90 days, but not exceeding one
year.
Cohesion invests its excess cash in deposits with major banks and in money
market securities of companies with strong credit ratings and from a variety of
industries. These securities are typically short-term in nature and, therefore,
bear minimal risk. Cohesion has not experienced any losses on its money market
investments.
Cohesion determines the appropriate classification of marketable securities
at the time of purchase and re-evaluates such designation as of each balance
sheet date. All of Cohesion's debt and equity securities are classified as
available-for-sale. The carrying value of available-for-sale debt securities
approximates fair value because of the short-term maturity of these investments.
Both realized and unrealized gains and losses on debt securities were immaterial
as of June 30, 1995, 1996 and 1997 and March 31, 1998 and for the years ended
June 30, 1995, 1996 and 1997 and the nine months ended March 31, 1997 and 1998.
Unrestricted available-for-sale equity securities in which Cohesion has a less
than 20% interest, which includes holdings in Boston Scientific (holdings in
Target Therapeutics, Inc. prior to April 1997) and Innovasive Devices are
carried at fair value with the unrealized gains and losses, net of tax, reported
as a separate component of stockholder's equity. Restricted equity securities in
which Cohesion has less than a 20% interest are carried at cost or estimated
realizable value, if less, and are included in "other investments and assets" in
the accompanying balance sheets. In fiscal 1995 and 1996, the carrying value of
certain restricted equity investments were reduced by $0.9 million and $4.0
million, respectively, to estimated net realizable value. The cost of securities
sold is based on the specific identification method. The fair value of public
equity securities held is based upon quoted closing market prices. The fair
value of private equity securities held approximates the carrying value based on
quoted market prices for similar securities.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. Interest and dividends on securities classified as available-for-sale
are included in interest income.
F-9
<PAGE> 94
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity Collar Instruments
At March 31, 1998, Cohesion held approximately 1.1 million shares of Boston
Scientific common stock. In August 1997, in order to manage the risk of market
fluctuations in this stock, Cohesion entered into certain costless collar
instruments (the "collars"), to hedge a portion (650,000 shares) of the Boston
Scientific equity securities against changes in market value. A costless collar
instrument is a form of equity collar instrument consisting of a purchased put
option and a written call option on a specific equity security such that the
cost of the purchased put and the proceeds of the written call offset each
other; therefore, there is no initial cost or cash outflow for these
instruments. Cohesion purchased the collars with expiration dates and numbers of
shares so that the potential adverse impact of movements in market price on the
stock will be at least partially offset by an associated increase in the value
of the collars.
Realized gains and losses on the collars are recorded in other income
(expense) with the related gains from the sale of the stock. Unrealized gains
and losses on these instruments, net of tax, are recorded as an adjustment to
unrealized gains and losses on available-for-sale investments, a component of
stockholder's and parent company equity, with a corresponding receivable or
payable recorded. Equity collar instruments that do not qualify for hedge
accounting and early termination of these instruments with the sale of the
underlying stock, would be recognized in other income (expense). For early
termination without the sale of the underlying stock, the intrinsic value will
adjust the cost basis of the underlying security.
Inventories
Inventories, which are purchased from Collagen, are valued at the lower of
cost, determined on a standard cost basis which approximates average cost, or
market.
Property and Equipment
Depreciation and amortization of property and equipment, which is stated at
cost, are provided on the straight-line method over estimated useful lives as
follows:
<TABLE>
<S> <C>
Machinery and equipment..................................... 3 - 7 years
Leasehold improvements...................................... Term of lease
</TABLE>
Intangible Assets
Intangible assets are amortized using the straight-line method. Patents
acquired prior to October 1996 are amortized over a seventeen year period
beginning with the effective date or over the remainder of such period from the
date acquired and patents purchased thereafter are expensed when acquired.
Trademarks acquired prior to fiscal 1996 are amortized over a twenty year period
beginning with the trademark filing dates and trademarks purchased thereafter
are expensed when acquired. The effect of changes in accounting for patents and
trademarks were not material to the accompanying financial statements.
Loans to Officers and Employees
Principal plus accrued interest due from current and former employees,
totaled approximately $161,000, $1.7 million, and $1.4 million at June 30, 1996,
and 1997, and March 31, 1998, respectively, prior to reserves. Principal plus
accrued interest due from officers totaled approximately $1.6 million, $9,000,
and $159,000 at
F-10
<PAGE> 95
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
June 30, 1996 and 1997, and March 31, 1998, respectively. The fair value of the
notes held approximates the carrying value based on quoted market prices for
loans with similar terms.
Included within the amounts due from current and former employees at June
30, 1997 and March 31, 1998, and within the amounts due from officers at June
30, 1996, are four promissory notes totaling $1.6 million, prior to reserves,
due from Collagen's former Chairman and Chief Executive Officer, Howard
Palefsky. All such notes are subject to interest at the lower of 10% per annum
or the prime rate. Two loans totaling $450,000 were forgiven on March 15, 1998
and two loans totaling $1.1 million are to be forgiven on March 15, 1999, but
all notes are repayable immediately if Mr. Palefsky discontinues serving as a
consultant to Cohesion prior to the loan forgiveness dates. Due to uncertainties
regarding collection, loans to Mr. Palefsky were fully reserved as of June 30,
1997, and the associated expenses were recognized in fiscal 1997.
Summary of Fair Values of Financial Instruments
The table below summarizes the carrying value and fair value of Cohesion's
financial instruments which are all held for purposes other than trading.
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
------------------ ------------------ ------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
Assets:
<S> <C> <C> <C> <C> <C> <C>
Cash Equivalents and Short-term
Investments (see Note 4).......... $ 7,417 $ 7,417 $10,599 $10,599 $ 3,139 $ 3,139
Boston Scientific Stock (see Note
5)................................ 65,841 65,841 83,874 83,874 75,455 75,455
Innovasive Devices Stock (see Note
6)................................ 4,064 8,440 5,670 9,916 5,594 8,439
Non-public Equity Securities
(see Notes 1 and 7)............... 7,786 7,786 8,189 8,189 5,010 5,010
Loans to Officers and Employees
(see Note 1)...................... 1,807 1,807 1,702 1,702 1,367 1,367
Equity Collar Instruments (See Note
1)................................ -- -- -- -- -- 1,562
Liabilities:
Borrowings under Line of Credit
(see Note 8)...................... $ 5,000 $ 5,000 $ -- $ -- $ -- $ --
</TABLE>
Revenue Recognition
Revenue from product sales is recognized at time of shipment, net of
allowances for estimated future returns.
Earnings Per Share
Cohesion computes earnings per share in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"). Per share data for each of the three years in
the period ended June 30, 1997 and the nine months ended March 31, 1997 and 1998
has not been presented as no common shares are outstanding and such information
would not be meaningful.
F-11
<PAGE> 96
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit and Other Risk
Cohesion sells its intermediate products (Vitrogen, Cell Prime, Zygen,
Angiostat and other bulk collagen products) to various universities and
institutions and its Collagraft(R) bone graft matrix implant and Collagraft(R)
bone graft matrix strip ("Collagraft bone graft products") to Zimmer, Inc.
("Zimmer"), Cohesion's marketing partner for Collagraft bone graft products.
Cohesion performs ongoing credit evaluations of its customers and generally does
not require collateral. Cohesion maintains reserves for potential credit losses
and such losses have been within management's expectations.
Cohesion allows, on occasion, its customers to return product for credit,
and also allows customers to return defective or damaged product for credit or
replacement. Written authorization from Cohesion is required to return
merchandise. Some domestic and foreign customers are subject to extended payment
terms. These practices have not had a material effect on Cohesion's working
capital.
As of March 31, 1998, Cohesion held 1,117,860 shares of Boston Scientific
common stock, valued at over $75 million (based on a market price of $67.50 per
share on such date). The market price of Boston Scientific's common stock is
highly volatile and, as a medical device manufacturer, Boston Scientific is
subject to a number of the same factors affecting its operations as Cohesion, as
well as additional factors not applicable to Cohesion. Any significant downward
fluctuation in the market price for Boston Scientific common stock could
adversely impact Cohesion's earnings (due to lower returns per share on sales of
such stock) as well as the value of Cohesion's total assets as stated on its
balance sheet (based on a lower carrying value for the Boston Scientific
investment, which as of March 31, 1998, represented approximately 79% of the
value of Cohesion's total assets).
All of Cohesion's research and development activities, its corporate
headquarters, and other critical business functions are located near major
earthquake faults. In addition, all of Cohesion's products are manufactured and
stored at Collagen's manufacturing and warehouse facility with Cohesion
currently maintaining only limited amounts of finished product inventory at
these facilities. Both facilities are located near major earthquake faults.
While Cohesion has some limited protection in the form of disaster recovery
programs and basic insurance coverage, Cohesion's operating results and
financial condition would be materially adversely affected in the event of a
major earthquake, fire or other similar calamity affecting these facilities.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," and Financial Accounting Standard No. 131 ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related Information," which will be required
to be adopted by Cohesion in fiscal 1999. Adoption of these statements is not
expected to have a significant impact on Cohesion's consolidated financial
position, results of operations or cash flows.
2. CONTRACTUAL AGREEMENTS WITH COLLAGEN
Cohesion has entered into supply, services, research and development,
benefits, tax allocation, and distribution agreements with Collagen effective
January 1, 1998. Under the Collagraft Supply Agreement, Collagen will supply
Cohesion's requirements of Collagraft necessary for Cohesion to fulfill its
obligations under its agreement with Zimmer at a price that is the greater of a
percentage of the sales price or a defined multiplier of Collagen's cost. In
accordance with the Collagen Supply Agreement, Collagen will supply
F-12
<PAGE> 97
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
2. CONTRACTUAL AGREEMENTS WITH COLLAGEN (CONTINUED)
Cohesion products, intermediates and finished materials at a price equal to a
multiplier of Collagen's cost. Under the Services Agreement, which is effective
through June 30, 1999, Cohesion shall provide Collagen with services in the
following areas: facilities, telephone, library, investor relations, research
and development services (to the extent not provided for by the research and
development agreement), and clinical and regulatory. Collagen shall provide
Cohesion with certain services in the following areas: financial and tax
services, health and welfare benefits administration and administration of the
401(k) Savings Plan, administrative, legal, regulatory, quality assurance,
medical affairs, and manufacturing services. Under the Services Agreement with
Collagen, Cohesion will use Collagen's computer systems until June 30, 1999.
Subsequent to June 30, 1999, Cohesion may extend its Services Agreement with
Collagen or elect to purchase its own computer systems. In accordance with the
Recombinant Technology and Development License Agreement, Cohesion and Collagen
will collaborate to develop recombinant human collagen and provide for cost
sharing for the project until certain milestones are met. The Benefits Agreement
provides for the continuation or replacement of benefits for the employees
transferred to Cohesion and employees remaining with Collagen. The Tax
Allocation Agreement provides that Collagen will be responsible for all taxes
prior to the Distribution date and Cohesion will be responsible for all of its
tax liabilities subsequent to that date. Under the Vitrogen International
Distribution Agreement, Collagen International, Inc., a subsidiary of Collagen,
shall act as Cohesion's distributor in Germany for Vitrogen.
3. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
JUNE 30,
---------------- MARCH 31,
1996 1997 1998
------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Other current assets:
Receivables from affiliates........................... $1,482 $ 331 $ 91
Other................................................. 358 611 358
------ ------ -------
$1,840 $ 942 $ 449
====== ====== =======
Property and equipment:
Machinery and equipment............................... $4,031 $4,733 $ 5,245
Leasehold improvements................................ 3,442 2,551 2,827
------ ------ -------
7,473 7,284 8,072
Less accumulated depreciation and amortization........ (5,936) (5,718) (6,068)
------ ------ -------
$1,537 $1,566 $ 2,004
====== ====== =======
Intangible assets:
Patents and trademarks................................ $2,887 $2,464 $ 2,428
Less amortization..................................... (1,037) (973) (1,053)
------ ------ -------
$1,850 $1,491 $ 1,375
====== ====== =======
Accrued liabilities:
Accrued liabilities -- research and development,
general and administrative and other............... $2,001 $1,283 $ 1,677
Legal fees............................................ 138 78 --
Employee related liabilities.......................... 154 155 193
------ ------ -------
$2,293 $1,516 $ 1,870
====== ====== =======
</TABLE>
F-13
<PAGE> 98
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
4. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale debt securities at
amortized cost which approximates fair value.
<TABLE>
<CAPTION>
JUNE 30,
----------------- MARCH 31,
1996 1997 1998
------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Equivalents:
Money market funds................................... $1,887 $ 1,601 $ --
Corporate obligations................................ 4,514 8,906 3,123
United States Government obligations................. 1,016 -- --
------ ------- -------
$7,417 $10,507 $ 3,123
====== ======= =======
Short-term investment:
Corporate obligations................................ $ -- $ 92 $ 16
====== ======= =======
</TABLE>
Cohesion uses amortized cost as the basis for recording gains and losses
from securities transactions. Contractual maturities of the debt securities do
not exceed one year at March 31, 1998.
5. INVESTMENT IN BOSTON SCIENTIFIC CORPORATION (TARGET THERAPEUTICS, INC.)
Cohesion's investment in Target Therapeutics, Inc. of Fremont, California
("Target") was accounted for under the equity method through November 1995.
During December 1995, Cohesion's ownership interest in Target fell below 20%.
Given that Cohesion did not have the ability to exercise significant influence,
Cohesion began accounting for its investment in Target under the cost method
beginning in December 1995. In fiscal 1996, Cohesion sold 1,792,000 shares of
Target common stock for a pre-tax gain of approximately $85.8 million and in
fiscal 1997, Cohesion sold 330,000 shares of Target common stock for a pre-tax
gain of approximately $9.1 million.
On January 20, 1997, Boston Scientific and Target jointly announced the
signing of a definitive agreement to merge in a tax-free stock-for-stock
transaction. On April 8, 1997, the merger was completed and, as a result,
Cohesion received 1,365,200 shares of Boston Scientific common stock in exchange
for Cohesion's 1,275,888 shares of Target common stock. Pursuant to the merger
agreement, Cohesion was restricted from selling its shares of Boston Scientific
common stock until the expiration of applicable pooling-of-interests
restrictions, which occurred during the first quarter of fiscal 1998. During the
nine months ended March 31, 1998, Cohesion sold 247,340 shares of Boston
Scientific common stock for a pre-tax gain of approximately $13.7 million.
Boston Scientific is a leading manufacturer of catheter-based devices that
can be inserted through small body openings and are used in heart surgery and
other operations. Boston Scientific common stock is quoted on the New York Stock
Exchange under the symbol BSX. On March 31, 1998, the closing price of Boston
Scientific common stock was $67.50 per share.
Cohesion's shares of Boston Scientific common stock are classified as
available-for-sale and have been recorded at the estimated fair value. The
unrealized gains (estimated fair value less cost) on these available-for-sale
securities have been reported as a separate component of stockholder's equity,
net of tax. The
F-14
<PAGE> 99
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
5. INVESTMENT IN BOSTON SCIENTIFIC CORPORATION (TARGET THERAPEUTICS, INC.)
(CONTINUED)
following is a summary of the aggregate estimated fair value, gross unrealized
gains and amortized cost of the Company's investment in Boston Scientific common
stock.
<TABLE>
<CAPTION>
JUNE 30,
------------------ MARCH 31,
1996 1997 1998
------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortized Cost............................... $ 7,432 $ 5,905 $ 4,835
Gross Unrealized Gains....................... 58,409 77,969 70,620
------- ------- -------
Estimated Fair Value......................... $65,841 $83,874 $75,455
======= ======= =======
</TABLE>
To hedge against fluctuations in the market value of a portion (650,000
shares) of the Boston Scientific common stock, in August 1997, Cohesion entered
into costless collar instruments that expire quarterly from August 1998 through
May 2001 and will require settlement in cash. The fair value of the purchased
puts and the written calls were determined based on quoted market prices at year
end. At March 31, 1998, the notional amount of the put and call options were
$41.2 million and $64.1 million, respectively. The fair value of the equity
collars at March 31, 1998 was $1.6 million.
6. INVESTMENT IN INNOVASIVE DEVICES, INC.
In October 1995, Cohesion purchased approximately 844,000 shares of common
stock, representing approximately 9% of the outstanding capital stock of
Innovasive Devices for $4.1 million and entered into a collaborative product
development agreement (the "Development Agreement"). Innovasive Devices
develops, manufactures and markets tissue and bone reattachment systems which
are particularly relevant to the sports medicine and arthroscopy segments of the
orthopaedic surgery market. Cohesion pursuant to the intercompany agreements,
assumed Collagen's relationship and obligations with Innovasive Devices.
Cohesion and Innovasive Devices are collaborating to develop certain resorbable
mechanical tissue-fixation devices utilizing collagen-based biomaterials for
applications in orthopaedic tissue repairs. Pursuant to the terms of the
Development Agreement, Cohesion is performing development activities in
accordance with a project plan and Innovasive Devices is reimbursing Cohesion
for such activities in accordance with the project budget. Accordingly, over the
next several years, the collaboration will require Cohesion's expertise with
collagen-based biomaterials and a small percentage of Cohesion's research and
development expenditures. In the event that marketable products are developed as
a result of this collaboration, Cohesion will have the right (but no obligation)
to manufacture such products.
Prior to October 1996, Cohesion's 844,000 shares of common stock of
Innovasive Devices were valued at cost or $4.1 million due to restrictions which
prevented the sale of any of Cohesion's shares of common stock of Innovasive
Devices. At March 31, 1998, restrictions were no longer applicable on 295,000
shares of common stock which Cohesion held in Innovasive Devices. Cohesion
carries the portion of its investment in Innovasive Devices which can be sold
within one year, as an available-for-sale investment at market value, or $2.9
million at March 31, 1998, reflecting an unrealized gain of $1.5 million ($2.9
million estimated fair value less $1.4 million cost), which has been included in
a separate component of stockholder's and parent company equity, net of tax. The
remaining 549,000 restricted shares of common stock continued to be valued at
cost of $2.7 million. The investment in Innovasive is included in "other
investments and assets" in the accompanying balance sheets.
During fiscal 1996 and 1997 and the nine months ended March 31, 1998,
Cohesion did not sell any of its shares of common stock of Innovasive Devices.
Innovasive Devices' common stock is quoted on The Nasdaq
F-15
<PAGE> 100
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
6. INVESTMENT IN INNOVASIVE DEVICES, INC. (CONTINUED)
Stock Market under the symbol IDEA. The closing price of Innovasive Devices'
common stock at March 31, 1998, was $10.00 per share. At March 31, 1998,
Cohesion held approximately a 9% ownership position in Innovasive Devices.
7. ACQUISITIONS OF COHESION CORPORATION
Collagen increased its ownership position in Cohesion Corporation of Palo
Alto, California from approximately 40% to 81% in May 1996 and from 81% to
approximately 99% in December 1997. Cohesion Corporation is a privately-held
company developing novel biomaterials with superior performance characteristics
in the area of hemostats, biosealants, and adhesion prevention barriers for
surgical applications. In connection with Collagen's May 1996 and December 1997
investments and purchases of Cohesion Corporation shares, substantially all of
the $3.0 million and $10.5 million purchase prices, respectively, were allocated
to in-process research and development, which was expensed at the time of the
purchases. The $10.5 million December 1997 purchase price includes $3.8 million
of cash compensation amounts associated with the purchase of certain vested
employee stock options, which amounts were expensed in accordance with
Accounting Principles Board Opinion No. 25. After consideration of the amounts
allocated to in-process technology, there was no excess of purchase price over
the fair value of the net assets acquired and no goodwill was recorded.
Cohesion determined the amounts to be allocated to in-process technology
for Cohesion Corporation based on whether technological feasibility had been
achieved and whether there was any alternative future use for the technology.
Cohesion concluded that the in-process technology had no alternative future use
after taking into consideration the potential for both usage of the technology
in different products and for resale of the technology. Such studies are still
preliminary and are subject to revision. At March 31, 1998, there were
additional unvested options outstanding providing for the purchase of the
remaining shares of Cohesion Corporation common stock. Cohesion is determining
the future activity, if any, it will take with respect to these options (see
Note 14, "Subsequent Events")
The unaudited pro forma results of operations of Cohesion assuming the
acquisitions of Cohesion Corporation shares occurred on July 1, 1995, on the
basis described above with all material intercompany transactions eliminated,
are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
-------------------- -----------------
1996 1997 1997 1998
-------- ------- ------- -----
<S> <C> <C> <C> <C>
Net income (loss).................................... $41,275 $4,314 $(3,116) $(481)
</TABLE>
The unaudited pro forma net income (loss) amounts above do not include the
charges for in-process research and development aggregating $13.5 million
arising from the acquisitions of shares of Cohesion Corporation. The unaudited
pro forma information is not necessarily indicative of the actual results of
operations had the transaction occurred at the beginning of the periods
indicated, nor should it be used to project Cohesion's results of operations for
any future dates or periods.
F-16
<PAGE> 101
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
8. COMMITMENTS
Minimum lease payments
Future minimum lease payments under noncancelable operating leases at June
30, 1997 are as follows (in thousands for years ended June 30):
<TABLE>
<S> <C>
1998........................................................ $ 988
1999........................................................ 982
2000........................................................ 560
2001........................................................ 558
2002........................................................ 558
Thereafter.................................................. 1,347
------
Total minimum lease payments...................... $4,993
======
</TABLE>
Rental expense was $833,000, $948,000, $722,000, $542,000 and $567,000 in
fiscal 1995, 1996, and 1997 and for the nine months ended March 31, 1997 and
1998, respectively.
Revolving Line of Credit Agreement
In November 1994, Collagen entered into a $7.0 million revolving line of
credit with a bank, secured by shares of Target common stock. The terms of this
facility contained certain financial covenants. In December 1995, the $7 million
revolving line of credit was increased to $15.0 million. During fiscal 1996,
$5.0 million was borrowed under this agreement. In June 1997, Collagen repaid
the outstanding balance and canceled the revolving line of credit agreement
prior to its expiration date of November 15, 1997. Interest associated with this
agreement was, at Collagen's option, based on either the prime rate plus 1/2%
or the Eurodollar rate plus the lesser of 1 1/4% or the Alternate LIBOR
applicable margin. Interest was payable monthly. Additionally, Collagen was
required to pay, on a quarterly basis, a commitment fee of 3/8 of 1% per annum
of the unused portion. The weighted average interest rate was 8.1% on the
outstanding short-term borrowings at June 30, 1996. The fair value of the
borrowings at June 30, 1996 of $5.0 million approximates fair value based on
quoted market prices for similar loans. The revolving line of credit was
allocated to Cohesion because the credit facility was secured by shares of
Target common stock, which were also allocated to Cohesion.
Bonus Agreement
In February 1996, Collagen entered into a cash bonus agreement with
Collagen's Chairman and Chief Executive Officer whereby cash bonuses in the
amounts of $325,000, $305,000, $285,000, $265,000 and $245,000 would be paid to
him on February 13 of each of the following five years beginning in 1997,
providing that he continued to serve Collagen on the applicable payment date. On
February 10, 1997, Mr. Palefsky resigned as Chief Executive Officer and
subsequently resigned as Chairman of the Board of Directors on June 20, 1997,
and as a result, the February 13, 1997 payment and future payments were not
required to be paid under this bonus agreement. The bonus agreement was replaced
by the officer separation agreement. Under the officer separation agreement, Mr.
Palefsky will continue to serve as a consultant to Cohesion during the next two
years and as a result, Cohesion will make payments to Mr. Palefsky during fiscal
1998 and fiscal 1999 totaling $575,000 and $233,000, respectively. These future
payments will be expensed as the services are provided.
F-17
<PAGE> 102
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
9. LEGAL MATTERS
In May 1997, Collagen settled its lawsuit with Matrix, which had been
pending since December 1994. The lawsuit involved Collagen's claims of trade
secret misappropriation against Matrix and two former Collagen employees hired
by Matrix in 1992, as well as cross-complaints against Collagen by Matrix and
the two employees for defamation and violation of state unfair competition law.
Collagen granted Matrix a nonexclusive license to certain intellectual
property (which was transferred to Cohesion effective January 1, 1998) for
certain nonmonetary consideration. The lawsuit was settled and dismissed with
prejudice. All claims by and against all parties have been released.
Cohesion is involved in other legal actions arising in the ordinary course
of business. While the outcome of such matters is currently not determinable, it
is management's opinion that these matters will not have a material adverse
effect on Cohesion's consolidated financial position or results of its
operations.
10. STOCKHOLDER'S AND PARENT COMPANY EQUITY
Preferred Stock
Cohesion has authorized 5,000,000 shares of preferred stock with a par
value of $0.001 per share. Each share of preferred stock is convertible into one
share of common stock at the option of the holder. Additionally, the preferred
shares automatically convert into common stock concurrent with the closing of an
underwritten public offering of common stock under the Securities Act of 1933 in
which Cohesion receives at least $10,000,000 in gross proceeds.
Preferred stockholders are entitled to noncumulative dividends at an annual
rate of $0.10 per share. Dividends will be paid only when declared by the Board
of Directors out of legally available funds. No dividends have been declared as
of March 31, 1998.
Preferred stockholders are entitled to a liquidation preference of $1.00
per share plus all declared and unpaid dividends. If, upon liquidation, the
assets of Cohesion are insufficient to permit the payment to the preferred
stockholders of the full liquidation preference, the assets of Cohesion will be
distributed ratably among the preferred stockholders. If the assets are more
than sufficient to pay the full preferences, then, following the payment of the
full preferences, the remaining assets of Cohesion shall be distributed ratably
to any holders of common stock.
Stock Options
Each employee (including officers), consultant, and non-employee director
of Collagen or any subsidiary of Collagen who, immediately prior to the
Distribution date, holds a vested Collagen stock option will, in connection with
the Distribution, receive two new options in replacement of the original vested
Collagen stock option, one to acquire shares of Collagen's common stock and the
other to acquire shares of Cohesion's common stock. Each new option will give
the holder the right to purchase a number of shares equal to the number of
shares in the original option.
Each employee (including officers), consultant, and non-employee director
of Collagen or any subsidiary of Collagen who, immediately prior to the
Distribution date, holds an unvested Collagen stock option will, in connection
with the Distribution, receive a new option in replacement of the unvested
Collagen stock option to acquire the same number of shares of common stock of
the entity (Collagen or Cohesion) for which such optionee shall be employed or
retained as a consultant or non-employee director following the Distribution.
F-18
<PAGE> 103
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
10. STOCKHOLDER'S AND PARENT COMPANY EQUITY (CONTINUED)
Cohesion expects that the replacement options described in the two
preceding paragraphs will result in the issuance of options for the purchase of
an aggregate of approximately 1.1 million shares of common stock. The exercise
price of each new option will be determined in accordance with Emerging Issues
Task Force Issue 90-9 as to be agreed upon by Collagen's Board and the Cohesion
Board (or any committee thereof) after consultation with legal and accounting
advisors. The exercise price of each new option is expected to generally
preserve any spread between the exercise price of the replaced option and the
fair market value of Collagen's stock on the Distribution date. The exercise
price, as adjusted in light of the above considerations, is not intended to
result in any compensation expense to Collagen or Cohesion. At the option of
Collagen's or the Cohesion Board, out-of-the-money options may be treated
differently.
Stock Purchase Plan
The Board of Directors of Collagen has designated Cohesion and each of
Cohesion's subsidiaries as a designated subsidiary under the Collagen Employee
Stock Purchase Plan ("ESPP") as of January 1, 1998. The Collagen ESPP and the
offering period that commenced on January 1, 1998 under the Collagen ESPP will
terminate one week prior to the record date for the Distribution and all
employee contributions through such date will be used to purchase shares of
Collagen common stock. As of that date, Collagen and Cohesion expect to have
adopted new employee stock purchase plans having such terms as are approved by
the respective Board of Directors, and the initial offering periods under each
such plan shall commence on or shortly after the Distribution date (see Note 14,
"Subsequent Events").
Subsidiary Stock Information
Stock Options
In April 1996, the Board of Directors of Cohesion Corporation approved the
adoption of the 1996 Cohesion Corporation Stock Option Plan which authorized the
issuance of 475,000 shares of Cohesion Corporation common stock under the plan.
In May 1997, the Board of Directors of Cohesion Corporation authorized the
issuance of an additional 300,000 shares of Cohesion Corporation stock under the
plan. The Board of Directors of Cohesion Corporation may grant incentive stock
options or non-statutory stock options to officers, directors, key employees and
consultants to purchase Cohesion Corporation's common stock. The options are
granted at no less than the fair market value at the dates of grant and
generally expire after ten years. Incentive stock options have a one-year cliff
period, at which time 25% of the options become vested with monthly vesting
thereafter, not to exceed a four-year vesting period from the vesting
commencement date. Non-statutory stock options become exercisable on a monthly
basis over a three-year period from the date of grant. The shares issued under
the plan are not convertible into shares of Cohesion, and Cohesion does not have
repurchase rights with respect to such shares (see Note 14, "Subsequent
Events").
At March 31, 1998, the total number of shares of common stock reserved for
issuance under Cohesion Corporation's Stock Option Plan was 775,000.
F-19
<PAGE> 104
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
10. STOCKHOLDER'S AND PARENT COMPANY EQUITY (CONTINUED)
Stock option activities under the Cohesion Corporation Stock Option Plan
were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER
NUMBER OPTION EXERCISE PRICE PRICE PER OF SHARES
OF SHARES RANGE PER SHARE SHARE EXERCISABLE
--------- --------------------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at May 1, and June 30, 1996........ 307,000 $0.20 - $0.20 $0.20 39,146
Granted........................................ 133,000 0.70 - 0.70 0.70
-------- ------------ -----
Outstanding at June 30, 1997................... 440,000 0.20 - 0.70 0.35 132,174
Granted........................................ 154,000 0.70 - 0.70 0.70
Exercised...................................... (177,828) 0.20 - 0.70 0.23
Forfeitures or expired......................... (38,437) 0.20 - 0.70 0.57
-------- ------------ -----
Outstanding at March 31, 1998.................. 377,735 $0.20 - $0.70 $0.55 219,071
======== ============ =====
Available for grant at March 31, 1998.......... 219,437
========
</TABLE>
Stock Compensation
Cohesion and Cohesion Corporation have elected to follow Accounting
Principles Board Statement No. 25 ("APB No. 25") and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123") requires the use of option valuation
models that were not developed for use in valuing employees stock options. Under
APB No. 25, because the exercise price of the employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is generally recognized.
Pro forma information regarding net income is required by SFAS 123 and
determined as if Cohesion and its subsidiaries had accounted for the Cohesion
Corporation employee stock options granted subsequent to Cohesion's acquisition
of a majority ownership in Cohesion Corporation in May 1996 under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model for the multiple-option
approach, with the following weighted-average assumptions for 1996 and 1997:
risk-free interest rate of 5.38% and 6.05%, respectively; volatility factor of
the expected market price of Cohesion Corporation's Common Stock of 0.43 and
0.49, respectively; no dividend payments; and a weighted-average expected life
of the options of 5 years and 5.5 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the employee stock options.
F-20
<PAGE> 105
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
10. STOCKHOLDER'S AND PARENT COMPANY EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income over the options' vesting period.
Cohesion's pro forma information follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
1996 1997
--------- --------
<S> <C> <C>
Pro forma net income...................................... $38,674 $4,973
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to May
1996, its pro forma effect will not be fully reflected until 1998. In addition,
such information does not include the effects of the options of Cohesion to be
issued in replacement of existing Collagen stock options in connection with the
expected Distribution of Cohesion.
The following table summarizes information about Cohesion Corporation stock
options outstanding at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE NUMBER
WEIGHTED REMAINING EXERCISABLE AS WEIGHTED
RANGE OF NUMBER AVERAGE CONTRACTUAL OF JUNE 30, AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE 1997 EXERCISE PRICE
- --------------- ----------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.20 307,000 $0.20 8.76 126,896 $0.20
0.70 133,000 0.70 9.53 5,278 0.70
------- ----- ---- ------- -----
$0.20 - $0.70 440,000 $0.35 9.00 132,174 $0.22
======= ===== ==== ======= =====
</TABLE>
The weighted-average fair value of options granted during the years ended
June 30, 1996 and 1997 were $.10 and $.33 per share, respectively.
11. INTERNATIONAL SALES, MAJOR CUSTOMER, AND PRODUCTS
Export sales, which were in European countries only, were $25,000 in fiscal
1995, $83,000 in fiscal 1996, $124,000 in fiscal 1997 and $117,000 and $83,000
in the nine months ended March 31, 1997 and 1998, respectively.
During fiscal years 1995, 1996, 1997 and the nine months ended March 31,
1997 and 1998, Cohesion realized product sales from its marketing partner,
Zimmer, of $3.0 million, $3.1 million, $1.9 million, $1.6 million and $1.1
million, respectively, which represented 85%, 86%, 77%, 78% and 74% of product
sales. Zimmer has exclusive marketing rights for Collagraft bone graft products
in the United States and Asia.
12. INCOME TAXES
Cohesion uses the liability method of accounting for income taxes required
by SFAS No. 109. The provision was prepared on the basis that Cohesion filed
separate tax returns in each year.
F-21
<PAGE> 106
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
12. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Cohesion's deferred tax assets and liabilities as of June 30, 1996 and 1997 are
presented below (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on Boston Scientific (Target) stock....... $23,860 $32,507
Investments............................................... 3,154 2,507
Intangible assets......................................... 64 38
Property, plant & equipment............................... 13 --
------- -------
Total deferred tax liabilities.................... 27,091 35,052
------- -------
Deferred tax assets:
Equity in losses of affiliates............................ 3,336 3,190
State income taxes........................................ 2,523 1,306
Non-deductible accruals................................... 1,000 1,127
Other..................................................... 95 175
Valuation allowance....................................... (3,301) (3,157)
------- -------
Total deferred tax assets......................... 3,653 2,641
------- -------
Net deferred tax liabilities...................... $23,438 $32,411
======= =======
</TABLE>
The valuation allowance increased by $685,000 and $2.1 million in fiscal
1995 and fiscal 1996, respectively and decreased by $144,000 in fiscal 1997.
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1995 1996 1997
----- ------- ------
<S> <C> <C> <C>
Current:
Federal................................................ $(176) $31,085 $1,981
State.................................................. 422 8,141 875
----- ------- ------
Total current.................................. 246 39,226 2,856
----- ------- ------
Deferred:
Federal................................................ -- (6,732) 203
State.................................................. 307 (776) 103
----- ------- ------
Total deferred................................. 307 (7,508) 306
----- ------- ------
$ 553 $31,718 $3,162
===== ======= ======
</TABLE>
F-22
<PAGE> 107
COHESION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED MARCH 31, 1997 AND 1998 AND
AS OF
MARCH 31, 1998 IS UNAUDITED)
12. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before taxes. The sources and
tax effects of the differences are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1995 1996 1997
----- ------- ------
<S> <C> <C> <C>
Income (loss) before income taxes......................... $(348) $70,365 $7,476
===== ======= ======
Expected tax at 35% or 34%................................ $(118) $24,628 $2,617
State income tax, net of federal benefit.................. 93 4,002 725
In-process research and development....................... -- 1,050 --
Equity in losses of affiliates............................ 728 1,863 (278)
Benefit from favorable tax settlement..................... (163) -- --
Other..................................................... 13 175 98
----- ------- ------
$ 553 $31,718 $3,162
===== ======= ======
</TABLE>
13. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED JUNE 30, MARCH 31,
--------------------------- --------------
1995 1996 1997 1997 1998
------ ------- ------ ------ ----
<S> <C> <C> <C> <C> <C>
Cash paid during the year for:
Interest............................... $2,113 $ 2,532 $ 377 $ 288 $--
Income taxes (net of refunds).......... -- 36,763 2,370 2,350 --
</TABLE>
14. SUBSEQUENT EVENTS (UNAUDITED)
In April 1998, Cohesion's Board adopted, and Collagen, as the sole
stockholder of Cohesion approved, Cohesion's 1998 Stock Option Plan, the 1998
Employee Stock Purchase Plan and the Directors' Stock Option Plan and reserved
2,607,000 shares, 250,000 shares and 268,000 shares of common stock,
respectively, for issuance thereunder.
Following the Distribution and approval by Cohesion's Board of Directors,
Cohesion anticipates offering to exchange or substitute the outstanding options
of Cohesion Corporation for options to acquire approximately 620,000 shares of
the common stock of Cohesion. The new options are expected to have an exercise
price substantially less than the fair market value of Cohesion's shares at the
time of such exchange, based on an assumed exchange ratio of 1.67 to 1 as
anticipated and to be determined by the Board of Directors. Assuming such offers
are accepted by the Cohesion Corporation option holders and assuming an expected
fair value of $10.00 per share at the date of the exchange, Cohesion expects to
record a non-cash compensation expense of approximately $1.5 million at the date
of the exchange in connection with vested options and an additional $4.5 million
of deferred compensation to be amortized during the next three fiscal years.
F-23
<PAGE> 108
COHESION TECHNOLOGIES, INC.
DESCRIPTION OF UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The terms of the Distribution are described in "The Distribution -- Manner
of Effecting the Distribution" included elsewhere in this Information Statement.
The unaudited pro forma balance sheet as of March 31, 1998, and the
unaudited pro forma statements of operations for the year ended June 30, 1997,
and the nine months ended March 31, 1998, and the related explanatory notes are
presented to show the effects of the Distribution and activities under the
Collagraft Supply Agreement and the Research and Development Agreement on the
financial position and results of operations of Cohesion Technologies, Inc.,
assuming that the Distribution occurred on March 31, 1998, for purposes of the
balance sheet and that the provisions of these agreements had been in place as
of July 1, 1996, for the purposes of the statements of operations. The pro forma
financial information is not necessarily indicative of the actual results that
would have occurred had the contribution by Collagen and the Distribution
occurred on these dates or of the future results of operations and financial
position of Cohesion Technologies, Inc.
The pro forma financial information gives effect to the adjustments set
forth in the notes thereto. Management believes that the assumptions used in
preparing the pro forma financial information provide a reasonable basis for
presenting all of the significant effects of the Distribution and related
agreements, that the pro forma adjustments give appropriate effect to those
assumptions and that the pro forma adjustments are properly applied in the pro
forma financial information.
This pro forma financial information should be read in conjunction with the
separate historical consolidated financial statements of Cohesion included
elsewhere in this Information Statement.
F-24
<PAGE> 109
COHESION TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 3,632 $ -- $ 3,632
Short-term investments................................... 16 -- 16
Accounts receivable, less allowance for doubtful accounts
of $3................................................. 183 -- 183
Inventories.............................................. 39 -- 39
Current deferred taxes................................... 875 -- 875
Other current assets..................................... 449 -- 449
------- ------- -------
Total current assets............................. 5,194 -- 5,194
Property and equipment, net................................ 2,004 -- 2,004
Intangible assets, net..................................... 1,375 -- 1,375
Investment in Boston Scientific Corporation................ 75,455 -- 75,455
Other investments.......................................... 9,854 -- 9,854
Long-term deferred taxes................................... 1,396 -- 1,396
Loans to officers and employees............................ 199 -- 199
Other assets............................................... 100 -- 100
------- ------- -------
$95,577 $ -- $95,577
======= ======= =======
LIABILITIES AND STOCKHOLDER'S AND PARENT COMPANY EQUITY
Current liabilities:
Accounts payable......................................... $ 449 $ -- $ 449
Accrued compensation..................................... 945 -- 945
Accrued liabilities...................................... 1,870 -- 1,870
Income taxes payable..................................... 300 -- 300
Payable due from Collagen................................ 317 -- 317
------- ------- -------
Total current liabilities........................ 3,881 -- 3,881
Long-term liabilities:
Deferred income taxes.................................... 32,087 -- 32,087
Other long-term liabilities.............................. 36 -- 36
------- ------- -------
Total long-term liabilities...................... 32,123 -- 32,123
Commitments and contingencies
Stockholder's and parent company equity:
Preferred stock; $0.001 par value; 10 shares outstanding
historical and no shares outstanding pro forma........ -- -- --
Common stock; $0.001 par value; no shares outstanding
historical and 8,951,227 shares outstanding pro
forma................................................. -- 9(1) 9
Additional paid-in capital............................... 9,621 7,137(1) 16,758
Parent company equity.................................... 7,146 (7,146)(1) --
Unrealized gain on available-for-sale investments........ 42,806 -- 42,806
------- ------- -------
Total stockholder's and parent company equity.... 59,573 -- 59,573
------- ------- -------
$95,577 $ -- $95,577
======= ======= =======
</TABLE>
The accompanying Notes to Unaudited Pro Forma Consolidated Financial Information
are an integral part of these statements.
F-25
<PAGE> 110
COHESION TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 NINE MONTHS ENDED MARCH 31, 1998
------------------------------------ -------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue -- product sales............ $ 2,527 $ -- $ 2,527 $ 1,472 $ -- $ 1,472
Costs and expenses:
Cost of sales..................... 2,105 (589)(2) 1,516 816 48(2) 864
Research and development.......... 9,627 (1,313)(3) 8,314 11,309 (1,015)(3) 10,294
General and administrative........ 7,153 -- 7,153 3,820 -- 3,820
Purchased in-process research and
development.................... -- -- -- 10,530 -- 10,530
-------- ------- -------- -------- ------- --------
Total costs and expenses....... 18,885 (1,902) 16,983 26,475 (967) 25,508
-------- ------- -------- -------- ------- --------
Loss from operations................ (16,358) 1,902 (14,456) (25,003) 967 (24,036)
Other income (expense):
Net gain on investments,
principally Boston Scientific
Corporation.................... 9,063 -- 9,063 13,739 -- 13,739
Net gain on sale of investment in
Prograft Medical, Inc.......... 15,395 -- 15,395 -- -- --
Equity in losses of other
affiliates..................... (813) -- (813) (9) -- (9)
Interest income................... 566 -- 566 262 -- 262
Interest expense.................. (377) -- (377) -- -- --
-------- ------- -------- -------- ------- --------
Income (loss) before provision for
income taxes and minority
interest.......................... 7,476 1,902 9,378 (11,011) 967 (10,044)
Provision for income taxes.......... 3,162 723(4) 3,885 -- --(4) --
Minority interest................... (667) -- (667) -- -- --
-------- ------- -------- -------- ------- --------
Net income (loss)................... $ 4,981 $ 1,179 $ 6,160 $(11,011) $ 967 $(10,044)
======== ======= ======== ======== ======= ========
Basic net income (loss) per
share(5).......................... $ 0.70 $ (1.13)
======== ========
Diluted net income (loss) per
share(5).......................... $ 0.69 $ (1.13)
======== ========
Shares used in calculating basic net
income (loss) per share(5)........ 8,804 8,901
======== ========
Shares used in calculating diluted
net income (loss) per share(5).... 8,930 8,901
======== ========
</TABLE>
The accompanying Notes to Unaudited Pro Forma Consolidated Financial Information
are an integral part of these statements.
F-26
<PAGE> 111
COHESION TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The pro forma information presented is theoretical in nature and not
necessarily indicative of the future results of operations or financial position
of Cohesion Technologies, Inc. ("Cohesion") or the results of operations and
financial position which would have resulted had Cohesion been a stand-alone
company during the periods presented. The pro forma financial information
reflect the effects of the Distribution and the Collagraft Supply Agreement and
the Research and Development Agreement between Collagen Corporation and
Cohesion.
PRO FORMA BALANCE SHEET ADJUSTMENTS
1. STOCKHOLDER'S EQUITY
These adjustments have been made as if the Distribution had occurred as of
March 31, 1998. The pro forma number of shares outstanding assumes a one-for-one
share distribution in connection with the Distribution.
PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS
2. COST OF SALES
This adjustment has been made to cost of sales to reflect the pricing under
the Supply agreements between Cohesion and Collagen as if such prospective
arrangements had been in place during the periods presented.
3. RESEARCH AND DEVELOPMENT
This adjustment has been made to research and development expense to
reflect the reimbursement of project costs under the Recombinant Technology and
Development License agreement between Cohesion and Collagen as if such
prospective arrangements had been in place during the periods presented.
4. INCOME TAXES
This adjustment reflects the necessary change in the income tax provision
that would occur if the Distribution had occurred on July 1, 1996, considering
all pro forma adjustments as described above. Such pro forma change was
insignificant for the nine months ended March 31, 1998.
5. NET INCOME (LOSS) PER SHARE
Pro forma share and per share data has been presented for the year ended
June 30, 1997 and the nine months ended March 31, 1998 assuming the distribution
of shares of Cohesion common stock to Collagen's stockholders based on the
number of Collagen common shares and common equivalent shares outstanding for
those periods, assuming a one-for-one exchange ratio in the distribution.
F-27
<PAGE> 112
APPENDIX - DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
DESCRIPTION:
Photo of CoStasis product being administered
Photo of sternal edge with caption "Before Use of CoStasis Hemostat"
Photo of sternal edge with caption "After Use of CoStasis Hemostat"
TEXT:
CoStasis(TM) Surgical Hemostat
CoStasis surgical hemostat is a sprayable liquid for use in surgical
procedures to control diffuse bleeding from capillaries, venules, and
arterioles. This type of bleeding is particularly problematic in
orthopedic, cardiovascular, general, and hepatic surgeries.
CoStasis is applied directly to the bleeding site in conjunction with
the patient's own plasma. The technology incorporates the hemostatic
advantages of collagen, fibrinogen and thrombin.
CoStasis can offer distinct advantages over fibrin sealants and other
currently available products in the United States, including faster
hemostasis, enhanced product safety and improved preparation, handling
and general performance characteristics.
Preclinical data demonstrate that CoStasis can be highly effective in
the control of bleeding from a variety of tissue sites. Cohesion
Technologies has received an Investigational Device Exemption from the
FDA and has commenced U.S. pivotal trials of CoStasis.
The Company's product candidates are under development and have not
received FDA approval for sale in the United States or approval by
international regulatory agencies for sale in international markets.
Approval by the FDA and international regulatory agencies could take
several years and there can be no assurance that such approval will
ever be obtained, or if obtained, that any or all of the Company's
product candidates will achieve market acceptance. See "Risk Factors -
Governmental Regulation" and "Business - Government Regulation."
PAGE 45
DESCRIPTION:
Illustration of CoStasis application device
TEXT:
CoStasis Delivery System
DESCRIPTION:
Illustration of CellPaker(TM) plasma processing system
TEXT:
CellPaker System
INSIDE BACK COVER
DESCRIPTION:
Photo of CoSeal product being administered
Photo of suture hole bleeding with caption "Before Use of CoSeal
Surgical Sealant"
Photo of suture hole closed with caption "After Use of CoSeal Surgical
Sealant"
TEXT:
CoSeal(TM) Surgical Sealant
CoSeal Surgical Sealant is a synthetic hydrogel designed to polymerize
at the site of application.
CoSeal is based on proprietary PEG polymer technology, which is
designed to bond strongly and rapidly to the patient's own tissue to
prevent leakage of fluids, solids or gases from the surgical or trauma
site.
Cohesion Technologies expects to begin clinical trials of CoSeal in
in the second half of 1998.
CoSeal can offer distinct advantages over current procedures, including
complete resorbability, improved elasticity, sealing strength, general
tissue adherence and greater ease of application.
The Company's product candidates are under development and have not
received FDA approval for sale in the United States or approval by
international regulatory agencies for sale in international markets.
Approval by the FDA and international regulatory agencies could take
several years and there can be no assurance that such approval will
ever be obtained, or if obtained, that any or all of the Company's
product candidates will achieve market acceptance. See "Risk Factors -
Governmental Regulation" and "Business - Government Regulation."
<PAGE> 113
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER NOTES DESCRIPTION
- ------- ------- ------------------------------------------------------------
<C> <S> <C>
2.1 (2)(12) Separation and Distribution Agreement dated January 1, 1998,
between the Company and Collagen Corporation.
3.1 Amended and Restated Certificate of Incorporation of the
Company.
3.2 Bylaws of the Company.
4.1 Specimen Stock Certificate.
10.1 (2)(13) Collagraft Supply Agreement dated January 1, 1998, between
the Company and Collagen Corporation.
10.2 (2)(14) Collagen Supply Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.3 (2)(15) Assignment and License Agreement dated January 1, 1998,
between the Company and Collagen Corporation.
10.4 (2)(16) Recombinant Technology Development and License Agreement
dated January 1, 1998, between the Company and Collagen
Corporation.
10.5 (17) Services Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.6 (18) Benefits Agreement dated January 1, 1998, between the
Company and Collagen Corporation.
10.7 (19) Tax Allocation and Indemnity Agreement dated January 1,
1998, between the Company and Collagen Corporation.
10.8 (2)(20) Vitrogen International Distribution Agreement dated January
1, 1998, between the Company and Collagen Corporation.
10.9 (2) Letter Agreement dated October 1, 1996 between Collagen
Corporation and Genotypes, Inc.
10.10 (11) Form of Indemnification Agreement between the Company and
each of its Officers and Directors.
10.11 (11) 1998 Stock Option Plan.
10.12 (11) 1998 Employee Stock Purchase Plan.
10.13 (11) 1998 Directors' Stock Option Plan.
10.14 (3) Collaborative Research and Distribution Agreement between
Collagen Corporation and Zimmer, Inc. dated as of June 26,
1985.
10.15 (4) Amendments dated February 16, 1993 and February 18, 1993
respectively, to the Product Development and Distribution
Agreement dated January 18, 1985 by and between Collagen
Corporation and Zimmer, Inc.
10.16 (5) Lease Agreement dated June 1, 1992 by and between Collagen
Corporation and Harbor Investment Partners.
10.17 (6) Lease Renewal for 2500 Faber Place, Palo Alto, dated
December 1, 1992 between Collagen Corporation and Leonard
Ely, Shirley Ely, Carl Carlsen and Mary Carlsen.
10.18 (2) Amended and Restated Research, Lease and Supply Agreement
dated as of February 20, 1996 between Collagen Corporation
and Pharming B.V.
10.19 (2) Research and Development Agreement dated October 17, 1995
between Collagen Corporation and Innovasive Devices, Inc.
10.20 (2) Manufacturing and Supply Agreement dated as of October 17,
1995 between Collagen Corporation and Innovasive Devices,
Inc.
10.21 (2) Distribution Agreement dated as of October 17, 1995 between
Collagen Corporation and Innovasive Devices, Inc.
10.22 (7) Promissory Note between Howard D. Palefsky and the
Registrant dated February 20, 1996.
10.23 (8)(11) Amended and Restated Secured Loan Agreement between Ross R.
Erickson and Collagen Corporation dated December 31, 1995.
10.24 (9) Loan Agreement between Collagen Corporation and Cohesion
Corporation dated May 24, 1996.
10.25 (10) Agreement between Howard D. Palefsky and Collagen
Corporation dated March 15, 1997.
10.26 (11) Form of Management Continuity Agreement between certain
officers of the Company and Collagen Corporation dated
February 7, 1997.
10.27 (2) Intellectual Property and Production Agreement between
Genotypes and Collagen Corporation dated August 15, 1996.
10.28 (11) Secured Loan Agreement between Charles Williams and Cohesion
Corporation dated December 15, 1997.
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
NUMBER NOTES DESCRIPTION
- ------- ------- ------------------------------------------------------------
<C> <S> <C>
21.1 * List of Subsidiaries (none).
27.1 * Financial Data Schedule.
</TABLE>
- ---------------
(1) To be supplied by amendment.
(2) Confidential treatment has been or will be requested as to certain portions
of this Exhibit.
(3) Incorporated by reference to Exhibit 10.24 filed with Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1985.
(4) Incorporated by reference to Exhibit 10.60 filed with Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1993.
(5) Incorporated by reference to Exhibit 10.56 filed with Collagen
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1992.
(6) Incorporated by reference to Exhibit 10.63 of Collagen Corporation's Annual
Report on Form 10-K for the fiscal year ended June 30, 1994.
(7) Incorporated by reference to Exhibit 10.79 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996.
(8) Incorporated by reference to Exhibit 10.76 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
1995.
(9) Incorporated by reference to Exhibit 10.82 of Collagen Corporation's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996.
(10) Incorporated by reference to Exhibit 10.88 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997.
(11) Management contract or compensatory plan or arrangement.
(12) Incorporated by reference to Exhibit 2.1 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(13) Incorporated by reference to Exhibit 10.104 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(14) Incorporated by reference to Exhibit 10.97 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(15) Incorporated by reference to Exhibit 10.103 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(16) Incorporated by reference to Exhibit 10.98 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(17) Incorporated by reference to Exhibit 10.100 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(18) Incorporated by reference to Exhibit 10.101 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(19) Incorporated by reference to Exhibit 10.99 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
(20) Incorporated by reference to Exhibit 10.102 of Collagen Corporation's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
* Previously filed.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
COHESION TECHNOLOGIES, INC.
The undersigned, David J. Foster and Craig W. Johnson, hereby certify
that:
FIRST: They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of said corporation.
SECOND: The Certificate of Incorporation of said corporation was
originally filed on June 11, 1997.
THIRD: That the Certificate of Incorporation of this corporation be
amended and restated in its entirety as follows:
ARTICLE I
The name of the corporation is Cohesion Technologies, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, County of New Castle. The name of
its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is 20,000,000 shares, of
which 15,000,000 shares shall be Common Stock and 5,000,000 shares shall be
Preferred Stock, each with a par value of $0.001.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors is hereby
authorized, in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of any wholly unissued series of Preferred Stock,
within the limitations and restrictions stated in this Amended and Restated
Certificate of Incorporation, to fix or alter the dividend rights, dividend
rate, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences of any wholly unissued series of
<PAGE> 2
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or any of them, and to increase or decrease the number of
shares of any series subsequent to the issue of shares of that series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
ARTICLE V
Upon the effective date of the filing of this Amended and Restated
Certificate of Incorporation, each share of this corporation's outstanding
Preferred Stock shall be converted and reconstituted into 886,104 shares of
Common Stock (the "Forward Stock Split"). In lieu of the issuance of fractional
shares, the corporation shall pay to the holder thereof in cash an amount equal
to the fraction of a share to which such holder is entitled multiplied by the
fair market value of such share, as determined by the corporation's Board of
Directors. All share amounts and amounts per share set forth in this Amended and
Restated Certificate of Incorporation have been appropriately adjusted to
reflect the Forward Stock Split.
ARTICLE VI
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend, and rescind any or all of the By-laws of this corporation.
ARTICLE VII
The number of directors of this corporation shall be fixed from time to
time by a By-law or amendment thereof duly adopted by the Board of Directors or
by the stockholders.
ARTICLE VIII
Elections of directors need not be by written ballot unless the By-laws
of this corporation shall so provide.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the By-laws may provide. The books of this corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-laws of this corporation.
-2-
<PAGE> 3
ARTICLE X
A director of this corporation shall, to the full extent permitted by
the Delaware General Corporation Law as it now exists or as it may hereafter be
amended, not be liable to this corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. Neither any amendment nor
repeal of this Article, nor the adoption of any provision of this Amended and
Restated Certificate of Incorporation inconsistent with this Article, shall
eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
ARTICLE XI
To the fullest extent permitted by applicable law, this corporation is
authorized to provide indemnification of (and advancement of expenses to) its
agents (and any other persons to which Delaware law permits this corporation to
provide indemnification) through By-law provisions, agreements with such agents
or other persons, vote of stockholders or disinterested directors or otherwise,
in excess of the indemnification and advancement otherwise permitted by Section
145 of the Delaware General Corporation Law, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect to actions
for breach of duty to this corporation, its stockholders, and others.
Any repeal or modification of any of the foregoing provisions of this
Article shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of this corporation with respect to any acts or
omissions of such director, officer, agent or other person occurring prior to
such repeal or modification.
ARTICLE XII
This corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation."
* * * *
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<PAGE> 4
FOURTH: That thereafter said amendment and restatement was duly adopted
in accordance with the provisions of Section 242 and Section 245 of the Delaware
General Corporation Law by obtaining a majority vote of each of the Common Stock
and Preferred Stock, in favor of said amendment and restatement in the manner
set forth in Section 228 of the Delaware General Corporation Law.
Executed this 25th day of June, 1998.
/s/ David J. Foster
------------------------------------------
David J. Foster, Chief Executive Officer
/s/ Craig W. Johnson
------------------------------------------
Craig W. Johnson, Secretary
-4-
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
COHESION TECHNOLOGIES, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I - CORPORATE OFFICES............................................................1
1.1 Registered Office............................................................1
1.2 Other Offices................................................................1
ARTICLE II - MEETINGS OF STOCKHOLDERS....................................................1
2.1 Place Of Meetings............................................................1
2.2 Annual Meeting...............................................................1
2.3 Special Meeting..............................................................1
2.4 Notice Of Stockholders' Meetings.............................................2
2.5 Manner Of Giving Notice; Affidavit Of Notice.................................2
2.6 Quorum.......................................................................2
2.7 Adjourned Meeting; Notice....................................................2
2.8 Conduct Of Business..........................................................3
2.9 Voting.......................................................................3
2.10 Waiver Of Notice............................................................3
2.11 Stockholder Action By Written Consent Without A Meeting.....................3
2.12 Record Date For Stockholder Notice; Voting; Giving Consents.................4
2.13 Proxies.....................................................................4
ARTICLE III - DIRECTORS..................................................................5
3.1 Powers.......................................................................5
3.2 Number Of Directors..........................................................5
3.3 Election, Qualification And Term Of Office Of Directors......................5
3.4 Resignation And Vacancies....................................................5
3.5 Place Of Meetings; Meetings By Telephone.....................................6
3.6 Regular Meetings.............................................................7
3.7 Special Meetings; Notice.....................................................7
3.8 Quorum.......................................................................7
3.9 Waiver Of Notice.............................................................7
3.10 Board Action By Written Consent Without A Meeting...........................8
3.11 Fees And Compensation Of Directors..........................................8
3.12 Approval Of Loans To Officers...............................................8
3.13 Removal Of Directors........................................................8
3.14 Chairman Of The Board Of Directors..........................................9
ARTICLE IV - COMMITTEES..................................................................9
4.1 Committees Of Directors......................................................9
4.2 Committee Minutes............................................................9
4.3 Meetings And Action Of Committees............................................9
ARTICLE V - OFFICERS....................................................................10
5.1 Officers....................................................................10
5.2 Appointment Of Officers.....................................................10
5.3 Subordinate Officers........................................................10
5.4 Removal And Resignation Of Officers.........................................10
5.5 Vacancies In Offices........................................................11
5.6 Chief Executive Officer.....................................................11
5.7 President...................................................................11
5.8 Vice Presidents.............................................................11
5.9 Secretary...................................................................11
5.10 Chief Financial Officer....................................................12
5.11 Representation Of Shares Of Other Corporations.............................12
5.12 Authority And Duties Of Officers...........................................13
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS........................................................................13
6.1 Indemnification Of Directors And Officers...................................13
6.2 Indemnification Of Others...................................................13
6.3 Payment Of Expenses In Advance..............................................13
6.4 Indemnity Not Exclusive.....................................................14
6.5 Insurance...................................................................14
6.6 Conflicts...................................................................14
ARTICLE VII - RECORDS AND REPORTS.......................................................15
7.1 Maintenance And Inspection Of Records.......................................15
7.2 Inspection By Directors.....................................................15
7.3 Annual Statement To Stockholders............................................15
ARTICLE VIII - GENERAL MATTERS..........................................................15
8.1 Checks......................................................................15
8.2 Execution Of Corporate Contracts And Instruments............................16
8.3 Stock Certificates; Partly Paid Shares......................................16
8.4 Special Designation On Certificates.........................................16
8.5 Lost Certificates...........................................................17
8.6 Construction; Definitions...................................................17
8.7 Dividends...................................................................17
8.8 Fiscal Year.................................................................17
8.9 Seal........................................................................18
8.10 Transfer Of Stock..........................................................18
8.11 Stock Transfer Agreements..................................................18
8.12 Registered Stockholders....................................................18
ARTICLE IX - AMENDMENTS.................................................................18
</TABLE>
-ii-
<PAGE> 3
BYLAWS
OF
COHESION TECHNOLOGIES, INC.
ARTICLE I
CORPORATE OFFICES
1.1 Registered Office.
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 Other Offices.
The Board of Directors may at any time establish other offices at
any place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 Place Of Meetings.
Meetings of stockholders shall be held at any place, within or
outside the State of Delaware, designated by the Board of Directors. In the
absence of any such designation, stockholders' meetings shall be held at the
registered office of the corporation.
2.2 Annual Meeting.
The annual meeting of stockholders shall be held on such date,
time and place, either within or without the State of Delaware, as may be
designated by resolution of the Board of Directors each year. At the meeting,
directors shall be elected and any other proper business may be transacted.
2.3 Special Meeting.
A special meeting of the stockholders may be called at any time
by the Board of Directors, the chairman of the board, the president or by one or
more stockholders holding shares in the aggregate entitled to cast not less than
ten percent of the votes at that meeting.
If a special meeting is called by any person or persons other
than the Board of Directors, the president or the chairman of the board, the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and
<PAGE> 4
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, any
vice president, or the secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of this Article II, that a meeting will be held at the time requested by
the person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. If the notice is not
given within twenty (20) days after the receipt of the request, the person or
persons requesting the meeting may give the notice. Nothing contained in this
paragraph of this Section 2.3 shall be construed as limiting, fixing, or
affecting the time when a meeting of stockholders called by action of the Board
of Directors may be held.
2.4 Notice Of Stockholders' Meetings.
All notices of meetings with stockholders shall be in writing and
shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws
not less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder entitled to vote at such meeting. The notice shall
specify the place, date, and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called.
2.5 Manner Of Giving Notice; Affidavit Of Notice.
Written notice of any meeting of stockholders, if mailed, is
given when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 Quorum.
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (a) the chairman of the meeting or (b)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
When a meeting is adjourned to another time or place, unless
these Bylaws otherwise require, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the
-2-
<PAGE> 5
corporation may transact any business that might have been transacted at the
original meeting. If the adjournment is for more than thirty (30) days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
2.8 Conduct Of Business.
The chairman of any meeting of stockholders shall determine the
order of business and the procedure at the meeting, including the manner of
voting and the conduct of business.
2.9 Voting.
The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.12 of these
Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver Of Notice.
Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of incorporation
or these Bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation or these
Bylaws.
2.11 Stockholder Action By Written Consent Without A Meeting.
Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting of stockholders
of the corporation, or any action that may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice, and without a vote if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in
-3-
<PAGE> 6
writing. If the action which is consented to is such as would have required the
filing of a certificate under any section of the General Corporation Law of
Delaware if such action had been voted on by stockholders at a meeting thereof,
then the certificate filed under such section shall state, in lieu of any
statement required by such section concerning any vote of stockholders, that
written notice and written consent have been given as provided in Section 228 of
the General Corporation Law of Delaware.
2.12 Record Date For Stockholder Notice; Voting; Giving Consents.
In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting, nor more than sixty (60) days prior to any
other action.
If the Board of Directors does not so fix a record date:
(a) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(b) The record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is delivered to the corporation.
(c) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
2.13 Proxies.
Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's
-4-
<PAGE> 7
attorney-in-fact. The revocability of a proxy that states on its face that it is
irrevocable shall be governed by the provisions of Section 212(e) of the General
Corporation Law of Delaware.
ARTICLE III
DIRECTORS
3.1 Powers.
Subject to the provisions of the General Corporation Law of
Delaware and any limitations in the certificate of incorporation or these Bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
Board of Directors.
3.2 Number Of Directors.
Upon the adoption of these bylaws, the number of directors
constituting the entire Board of Directors shall be not less than one (1) nor
more than five (5) persons. The exact number of directors shall be one (1)
person until changed by a proper amendment of this Section 3.2. Thereafter, this
number may be changed by a resolution of the Board of Directors or of the
stockholders, subject to Section 3.4 of these Bylaws. No reduction of the
authorized number of directors shall have the effect of removing any director
before such director's term of office expires.
3.3 Election, Qualification And Term Of Office Of Directors.
Except as provided in Section 3.4 of these Bylaws, directors
shall be elected at each annual meeting of stockholders to hold office until the
next annual meeting. Directors need not be stockholders unless so required by
the certificate of incorporation or these Bylaws, wherein other qualifications
for directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 Resignation And Vacancies.
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or
these Bylaws:
-5-
<PAGE> 8
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause,
the corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 Place Of Meetings; Meetings By Telephone.
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, members of the Board of Directors, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 Regular Meetings.
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
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<PAGE> 9
3.7 Special Meetings; Notice.
Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the chairman of the board, the president,
any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-class
mail or telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or by telegram, it shall be delivered personally or
by telephone or to the telegraph company at least forty-eight (48) hours before
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose or the place of the meeting, if the meeting is to be held at the
principal executive office of the corporation.
3.8 Quorum.
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver Of Notice.
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
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<PAGE> 10
3.10 Board Action By Written Consent Without A Meeting.
Unless otherwise restricted by the certificate of incorporation
or these Bylaws, any action required or permitted to be taken at any meeting of
the Board of Directors, or of any committee thereof, may be taken without a
meeting if all members of the board or committee, as the case may be, consent
thereto in writing and the writing or writings are filed with the minutes of
proceedings of the board or committee. Written consents representing actions
taken by the board or committee may be executed by telex, telecopy or other
facsimile transmission, and such facsimile shall be valid and binding to the
same extent as if it were an original.
3.11 Fees And Compensation Of Directors.
Unless otherwise restricted by the certificate of incorporation
or these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
3.12 Approval Of Loans To Officers.
The corporation may lend money to, or guarantee any obligation
of, or otherwise assist any officer or other employee of the corporation or of
its subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 Removal Of Directors.
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.
3.14 Chairman Of The Board Of Directors.
The corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the corporation.
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<PAGE> 11
ARTICLE IV
COMMITTEES
4.1 Committees Of Directors.
The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate 1 or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board of Directors, or in these Bylaws,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to the following matters: (i) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by this chapter to be
submitted to stockholders for approval or (ii) adopting, amending or repealing
any Bylaw of the corporation.
4.2 Committee Minutes.
Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
4.3 Meetings And Action Of Committees.
Meetings and actions of committees shall be governed by, and held
and taken in accordance with, the provisions of Section 3.5 (place of meetings
and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
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<PAGE> 12
ARTICLE V
OFFICERS
5.1 Officers.
The officers of the corporation shall be a chief executive
officer, a president, a secretary, and a chief financial officer. The
corporation may also have, at the discretion of the Board of Directors, one or
more vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and any such other officers as may be appointed in accordance with
the provisions of Section 5.3 of these Bylaws. Any number of offices may be held
by the same person.
5.2 Appointment Of Officers.
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 Subordinate Officers.
The Board of Directors may appoint, or empower the chief
executive officer or the president to appoint, such other officers and agents as
the business of the corporation may require, each of whom shall hold office for
such period, have such authority, and perform such duties as are provided in
these Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal And Resignation Of Officers.
Subject to the rights, if any, of an officer under any contract
of employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the Secretary of the corporation. Any resignation shall take effect
at the date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the corporation under any contract
to which the officer is a party.
5.5 Vacancies In Offices.
Any vacancy occurring in any office of the corporation shall be
filled by the Board of Directors.
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<PAGE> 13
5.6 Chief Executive Officer.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these bylaws.
5.7 President.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the chairman of the board (if any) or the chief
executive officer, the president shall have general supervision, direction, and
control of the business and other officers of the corporation. He or she shall
have the general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 Secretary.
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
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<PAGE> 14
The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors required to be given
by law or by these Bylaws. He or she shall keep the seal of the corporation, if
one be adopted, in safe custody and shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or by these
Bylaws.
5.10 Chief Financial Officer.
The chief financial officer shall keep and maintain, or cause to
be kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the bylaws.
5.11 Representation Of Shares Of Other Corporations.
The chairman of the board, the chief executive officer, the
president, any vice president, the chief financial officer, the secretary or
assistant secretary of this corporation, or any other person authorized by the
Board of Directors or the chief executive officer or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by the person
having such authority.
5.12 Authority And Duties Of Officers.
In addition to the foregoing authority and duties, all officers
of the corporation shall respectively have such authority and perform such
duties in the management of the business of the corporation as may be designated
from time to time by the Board of Directors or the stockholders.
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<PAGE> 15
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER
AGENTS
6.1 Indemnification Of Directors And Officers.
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (a) who is or was
a director or officer of the corporation, (b) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was a director
or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification Of Others.
The corporation shall have the power, to the maximum extent and
in the manner permitted by the General Corporation Law of Delaware, to indemnify
each of its employees and agents (other than directors and officers) against
expenses (including attorneys' fees), judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding,
arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Section 6.2, an "employee" or "agent" of the
corporation (other than a director or officer) includes any person (a) who is or
was an employee or agent of the corporation, (b) who is or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 Payment Of Expenses In Advance.
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which indemnification
is permitted pursuant to Section 6.2 following authorization thereof by the
Board of Directors shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall ultimately be
determined that the indemnified party is not entitled to be indemnified as
authorized in this Article VI.
6.4 Indemnity Not Exclusive.
The indemnification provided by this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw,
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<PAGE> 16
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in an official capacity and as to action in another capacity while
holding such office, to the extent that such additional rights to
indemnification are authorized in the certificate of incorporation
6.5 Insurance.
The corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
6.6 Conflicts.
No indemnification or advance shall be made under this Article
VI, except where such indemnification or advance is mandated by law or the
order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(a) That it would be inconsistent with a provision of the
certificate of incorporation, these Bylaws, a resolution of the stockholders or
an agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
7.1 Maintenance And Inspection Of Records.
The corporation shall, either at its principal executive offices
or at such place or places as designated by the Board of Directors, keep a
record of its stockholders listing their names and addresses and the number and
class of shares held by each stockholder, a copy of these Bylaws as amended to
date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other
agent, shall, upon written demand under oath stating the purpose thereof, have
the right during the usual hours for business to inspect for any proper purpose
the corporation's stock ledger, a list of its stockholders, and its other books
and records and to make copies or extracts therefrom. A proper purpose shall
mean a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent is the person who seeks the
right to inspection,
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<PAGE> 17
the demand under oath shall be accompanied by a power of attorney or such other
writing that authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the corporation at its
registered office in Delaware or at its principal place of business.
7.2 Inspection By Directors.
Any director shall have the right to examine the corporation's
stock ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 Annual Statement To Stockholders.
The Board of Directors shall present at each annual meeting, and
at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 Checks.
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 Execution Of Corporate Contracts And Instruments.
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
The shares of a corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of
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<PAGE> 18
any or all classes or series of its stock shall be uncertificated shares. Any
such resolution shall not apply to shares represented by a certificate until
such certificate is surrendered to the corporation. Notwithstanding the adoption
of such a resolution by the Board of Directors, every holder of stock
represented by certificates and upon request every holder of uncertificated
shares shall be entitled to have a certificate signed by, or in the name of the
corporation by the chairman or vice-chairman of the Board of Directors, or the
chief executive officer or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation On Certificates.
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 Lost Certificates.
Except as provided in this Section 8.5, no new certificates for
shares shall be issued to replace a previously issued certificate unless the
latter is surrendered to the corporation and cancelled at the same time. The
corporation may issue a new certificate of stock or uncertificated shares in the
place of any certificate previously issued by it, alleged to have been lost,
stolen or destroyed, and the corporation may require the owner of the lost,
stolen or
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<PAGE> 19
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
Unless the context requires otherwise, the general provisions,
rules of construction, and definitions in the Delaware General Corporation Law
shall govern the construction of these Bylaws. Without limiting the generality
of this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 Dividends.
The directors of the corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or (b) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the
funds of the corporation available for dividends a reserve or reserves for any
proper purpose and may abolish any such reserve. Such purposes shall include but
not be limited to equalizing dividends, repairing or maintaining any property of
the corporation, and meeting contingencies.
8.8 Fiscal Year.
The fiscal year of the corporation shall be fixed by resolution
of the Board of Directors and may be changed by the Board of Directors.
8.9 Seal.
The corporation may adopt a corporate seal, which may be altered
at pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 Transfer Of Stock.
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
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<PAGE> 20
8.11 Stock Transfer Agreements.
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends and to vote as such owner, shall be entitled to hold liable for calls
and assessments the person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The Bylaws of the corporation may be adopted, amended or repealed
by the stockholders entitled to vote; provided, however, that the corporation
may, in its certificate of incorporation, confer the power to adopt, amend or
repeal Bylaws upon the directors. The fact that such power has been so conferred
upon the directors shall not divest the stockholders of the power, nor limit
their power to adopt, amend or repeal Bylaws.
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<PAGE> 1
EXHIBIT 4.1
<TABLE>
<S> <C> <C>
NUMBER SHARES
COHESION TECHNOLOGIES, INC.
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR STATEMENTS RELATING
THE STATE OF DELAWARE TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
CUSIP 19248N 10 1
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.001 PER SHARE, OF
COHESION TECHNOLOGIES, INC.
transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney
upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated
COHESION TECHNOLOGIES, INC.
CORPORATE
/s/ Frank DeLustro, Ph.D. SEAL /s/ David Foster
JUNE 30,
PRESIDENT AND CHIEF OPERATING OFFICER 1997 CHIEF EXECUTIVE OFFICER
DELAWARE
COUNTERSIGNED AND REGISTERED:
THE BANK OF NEW YORK, N.A.
(NEW YORK NY)
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
</TABLE>
<PAGE> 2
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _______________ Custodian _______________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _____________________________________
in common (State)
UNIF TRF MIN ACT -- ____________ Custodian (until age _______)
(Cust)
________________ under Uniform Transfers
(Minor)
to Minors Act ___________________________
(State)
Additional abbreviations may also be used though not in the above list.
</TABLE>
FOR VALUE RECEIVED, _________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________________________
X _______________________________________
X _______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By _____________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 10.10
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into this ______ of __________, 199__
between Cohesion Technologies, Inc., a Delaware corporation ("Corporation"), and
_______________ ("Indemnitee").
RECITALS:
A. Indemnitee, a member of the Board of Directors or an officer
of Corporation, performs a valuable service in such capacity for Corporation;
and
B. The stockholders of Corporation have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors, agents
and employees of Corporation to the maximum extent authorized by Section 145 of
the Delaware Corporations Code, as amended ("Code"); and
C. The Bylaws and the Code, by their non-exclusive nature, permit
contracts between Corporation and the members of its Board of Directors or
officers with respect to indemnification of such directors and/or officers; and
D. In accordance with the authorization as provided by the Code,
Corporation has purchased and presently maintains a policy or policies of
Directors and Officers Liability Insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its directors and officers in the
performance as directors of Corporation; and
E. As a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors or officers by
such D & O Insurance and by statutory and by-law indemnification provisions; and
F. In order to induce Indemnitee to continue to serve as a member
of the Board of Directors and/or an officer of Corporation, Corporation has
determined and agreed to enter into this contract with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's continued
service as a director and/or an officer after the date hereof, the parties
hereto agree as follows:
1. INDEMNITY OF INDEMNITEE. Corporation hereby agrees to hold
harmless and indemnify Indemnitee to the fullest extent authorized or permitted
by the provisions of the Code, as may be amended from time to time.
<PAGE> 2
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth
in Section 3 hereof, Corporation hereby further agrees to hold harmless and
indemnify Indemnitee:
(a) against any and all expenses (including attorneys' fees),
witness fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of Corporation) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of the fact that Indemnitee is, was or at any time becomes a
director, officer, employee or agent of Corporation, or is or was serving or at
any time serves at the request of Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to
Indemnitee by Corporation under the non-exclusivity provisions of Section 6 of
Article VII of the Bylaws of Corporation and the Code.
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 2 hereof shall be paid by Corporation:
(a) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of such losses for which the Indemnitee
is indemnified pursuant to Section 1 hereof or pursuant to any D & O Insurance
purchased and maintained by Corporation;
(b) in respect to remuneration paid to Indemnitee if it shall
be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(c) on account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase or sale
by Indemnitee of securities of Corporation pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
(d) on account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct;
(e) on account of Indemnitee's conduct which is the subject of
an action, suit or proceeding described in Section 7(c)(ii) hereof;
(f) on account of any action, claim or proceeding (other than
a proceeding referred to in Section 8(b) hereof) initiated by the Indemnitee
unless such action, claim or proceeding was authorized in the specific case by
action of the Board of Directors;
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<PAGE> 3
(g) if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not lawful (and, in this
respect, both Corporation and Indemnitee have been advised that the Securities
and Exchange Commission believes that indemnification for liabilities arising
under the federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication).
4. CONTRIBUTION. If the indemnification provided in Sections 1
and 2 hereof is unavailable by reason of a Court decision described in Section
3(g) hereof based on grounds other than any of those set forth in paragraphs (b)
through (f) of Section 3 hereof, then in respect of any threatened, pending or
completed action, suit or proceeding in which Corporation is jointly liable with
Indemnitee (or would be if joined in such action, suit or proceeding),
Corporation shall contribute to the amount of expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred and paid or payable by Indemnitee in such proportion as is appropriate
to reflect (i) the relative benefits received by Corporation on the one hand and
Indemnitee on the other hand from the transaction from which such action, suit
or proceeding arose, and (ii) the relative fault of Corporation on the one hand
and of Indemnitee on the other in connection with the events which resulted in
such expenses, judgments, fines or settlement amounts, as well as any other
relevant equitable considerations. The relative fault of Corporation on the one
hand and of Indemnitee on the other shall be determined by reference to, among
other things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such expenses,
judgments, fines or settlement amounts. Corporation agrees that it would not be
just and equitable if contribution pursuant to this Section 4 were determined by
pro rata allocation or any other method of allocation which does not take
account of the foregoing equitable considerations.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of
Corporation contained herein shall continue during and pertain to the period
Indemnitee is or was a director, officer, employee or agent of Corporation (or
is or was serving at the request of Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise) and shall continue thereafter so long as
Indemnitee shall be subject to any possible claim or threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative,
by reason of the fact that Indemnitee was a director and/or an officer of
Corporation or serving in any other capacity referred to herein.
6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30)
days after receipt by Indemnitee of notice of the commencement of any action,
suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made
against Corporation under this Agreement, notify Corporation of the commencement
thereof; but the omission so to notify Corporation will not relieve it from any
liability which it may have to Indemnitee otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Indemnitee
notifies Corporation of the commencement thereof:
(a) Corporation will be entitled to participate therein at its
own expense;
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<PAGE> 4
(b) except as otherwise provided below, to the extent that it
may wish, Corporation jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After notice from Corporation to Indemnitee of its
election so as to assume the defense thereof, Corporation will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its counsel in such action, suit or proceeding
but the fees and expenses of such counsel incurred after notice from Corporation
of its assumption of the defense thereof shall be at the expense of Indemnitee
unless (i) the employment of counsel by Indemnitee has been authorized by
Corporation, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between Corporation and Indemnitee in the conduct of the
defense of such action or (iii) Corporation shall not in fact have employed
counsel to assume the defense of such action, in each of which cases the fees
and expenses of Indemnitee's separate counsel shall be at the expense of
Corporation. Corporation shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of Corporation or as to which
Indemnitee shall have made the conclusion provided for in (ii) above; and
(c) Corporation shall not be liable to indemnify Indemnitee
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. Corporation shall be permitted to settle
any action except that it shall not settle any action or claim in any manner
which would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent. Neither Corporation nor Indemnitee will unreasonably withhold
its consent to any proposed settlement.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES.
(a) In the event that Indemnitee employs his or her own
counsel pursuant to Section 6(b)(i) through (iii) above, Corporation shall
advance to Indemnitee, prior to any final disposition of any threatened or
pending action, suit or proceeding, whether civil, criminal, administrative or
investigative, any and all reasonable expenses (including legal fees and
expenses) incurred in investigating or defending any such action, suit or
proceeding within ten (10) days after receiving copies of invoices presented to
Indemnitee for such expenses.
(b) Indemnitee agrees that Indemnitee will reimburse
Corporation for all reasonable expenses paid by Corporation in defending any
civil or criminal action, suit or proceeding against Indemnitee in the event and
only to the extent it shall be ultimately determined by a final judicial
decision (from which there is no right of appeal) that Indemnitee is not
entitled, under the provisions of the Code, the Bylaws, this Agreement or
otherwise, to be indemnified by Corporation for such expenses.
(c) Notwithstanding the foregoing, Corporation shall not be
required to advance such expenses to Indemnitee if Indemnitee (i) commences any
action, suit or proceeding as a plaintiff unless such advance is specifically
approved by a majority of the Board
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<PAGE> 5
of Directors or (ii) is a party to an action, suit or proceeding brought by
Corporation and approved by a majority of the Board of Directors which alleges
willful misappropriation of corporate assets by Indemnitee, disclosure of
confidential information in violation of Indemnitee's fiduciary or contractual
obligations to Corporation, or any other willful and deliberate breach in bad
faith of Indemnitee's duty to Corporation or its stockholders.
8. ENFORCEMENT.
(a) Corporation expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on Corporation
hereby in order to induce Indemnitee to continue as a director and/or an officer
of Corporation, and acknowledges that Indemnitee is relying upon this Agreement
in continuing in such capacity.
(b) In the event Indemnitee is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, the Corporation shall reimburse Indemnitee for all Indemnitee's
reasonable fees and expenses in bringing and pursuing such action.
9. SUBROGATION. In the event of payment under this agreement,
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable
Corporation effectively to bring suit to enforce such rights.
10. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee
by this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of Corporation's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his or her official capacity and
as to action in another capacity while holding office.
11. SURVIVAL OF RIGHTS. The rights conferred on Indemnitee by
this Agreement shall continue after Indemnitee has ceased to be a director,
officer, employee or other agent of Corporation and shall inure to the benefit
of Indemnitee's heirs, executors and administrators.
12. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the
Corporation to indemnify the Indemnitee to the full extent provided by the
Bylaws or the Code.
13. GOVERNING LAW. This Agreement shall be interpreted and
enforced in accordance with the laws of the State of Delaware.
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<PAGE> 6
14. BINDING EFFECT. This Agreement shall be binding upon
Indemnitee and upon Corporation, its successors and assigns, and shall inure to
the benefit of Indemnitee, his or her heirs, personal representatives and
assigns and to the benefit of Corporation, its successors and assigns.
15. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
COHESION TECHNOLOGIES, INC.,
a Delaware corporation
By:
----------------------------------
Title:
-------------------------------
INDEMNITEE
-------------------------------------
Name
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<PAGE> 1
EXHIBIT 10.28
COHESION CORPORATION
SECURED LOAN AGREEMENT
This Secured Loan Agreement ("Agreement") is made as of December 15,
1997, by and between Cohesion Corporation, a California corporation (the
"COMPANY"), and Charles Williams ("BORROWER").
INTRODUCTION
Borrower desires to borrow from the Company, and the Company desires to
lend to Borrower one hundred fifty thousand dollars and no cents ($150,000.00),
(the "BORROWED AMOUNT"). The parties desire that such loan shall be secured on
the terms and conditions contained herein by (a) certain real property owned by
Borrower (the "PROPERTY") and (b) all shares of the Company's capital stock
issued to Borrower upon exercise of stock options currently held or hereafter
acquired by Borrower while the Borrowed Amount is outstanding (the "SHARES").
AGREEMENT
In consideration of the mutual promises, covenants and agreements
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto hereby agree
as follows:
1. Agreement to Lend. Subject to the terms and conditions contained
herein and upon execution of this Agreement, the Company agrees to issue to
Borrower a check or other readily available funds in the Borrowed Amount on the
date of this Agreement.
2. Promissory Note. In consideration of the Company's delivery of the
Borrowed Amount, Borrower will execute the secured promissory note attached
hereto as Exhibit A (the "NOTE"), in the principal amount of the Borrowed Amount
and bearing interest at the rate prescribed therein.
3. Security Agreement. Borrower will additionally execute the Security
Agreement attached hereto as Exhibit B (the "SECURITY AGREEMENT") as security
for Borrower's obligation to repay the Borrowed Amount, and will deliver, or
cause to be delivered, all certificates representing the Shares to the Company
or its designee as pledgeholder of the Shares, together with such other
documents of assignment and other documents as may be reasonably requested by
the Company to perfect its security interest in and to the Shares and the
Property, including, without limitation, a Deed of Trust in form and substance
reasonably satisfactory to the Company. The Shares will be held by the Company
or its designee as pledgeholder and shall be released according to the terms of
the Security Agreement.
4. Successors or Assigns. Borrower and the Company agree that all of the
terms of this Agreement shall be binding on their successors and assigns, and
that the term "Borrower" and the term "Company " as used herein shall be deemed
to include as to each party, for all purposes, the designees, successors,
assigns, heirs, executors and administrators of such party.
<PAGE> 2
5. Governing Law. This Agreement shall be interpreted and governed under
the laws of the State of California.
6. Amendment. This Agreement may be amended only by a written instrument
signed by each party hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Secured Loan
Agreement as of the day and year first above written.
"BORROWER" CHARLES WILLIAMS
/s/ CHARLES WILLIAMS
----------------------------------
(Signature)
Address:
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----------------------------------
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"COMPANY" COHESION CORPORATION
By: /s/ FRANK DELUSTRO, PH.D.
-------------------------------
Title:
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<PAGE> 3
EXHIBIT A
SECURED PROMISSORY NOTE
$150,000.00 Palo Alto, California
December 15, 1997
FOR VALUE RECEIVED, CHARLES WILLIAMS promises to pay to Cohesion
Corporation, a California corporation (the "COMPANY"), the principal sum of one
hundred fifty thousand dollars and no cents ($150,000.00), together with
interest on the unpaid principal hereof to be accrued quarterly from the date
hereof at the prime rate of interest as of the last day of the calendar quarter,
as reported in the Wall Street Journal.
All principal and accrued interest shall be due and payable in a single
installment in full on the earlier of (a) June 15, 1999, or (b) termination of
the undersigned's employment with the Company for any reason (or for no reason).
Payments of principal and interest shall be made in lawful money of the United
States of America and shall be credited first to the accrued interest, with the
remainder applied to principal.
The undersigned may at any time prepay all or any portion of the
principal or interest owing hereunder.
This Note is subject to the terms of an Secured Loan Agreement of even
date herewith, by and between the Company and the undersigned, and is secured by
a Deed of Trust with respect to real property as well as by a pledge of the
certain of the capital stock of the Company, each under the terms of a Security
Agreement of even date herewith and is subject to all the provisions thereof.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
The holder of this Note shall have full recourse against the maker, and
shall not be required to proceed against the collateral securing this Note in
the event of default.
/s/ CHARLES WILLIAMS
---------------------------------
CHARLES WILLIAMS
<PAGE> 4
EXHIBIT B
SECURITY AGREEMENT
This Security Agreement is made as of December 15, 1997, between
Cohesion Corporation, a Delaware corporation ("PLEDGEE"), and Charles Williams
("PLEDGOR").
INTRODUCTION
Pledgee has loaned or will loan to Pledgor, and Pledgor has borrowed or
will borrow from Pledgee, one hundred fifty thousand dollars and no cents
($150,000.00), which loan is or shall be evidenced by a promissory note (the
"NOTE") and is to be secured by (a) certain real property owned or to be
acquired by Pledgor located at ___________________________________________ (the
"PROPERTY") and (b) shares of Pledgee's capital stock issued upon exercise of
stock options currently held or hereafter acquired by Pledgor while the Borrowed
Amount is outstanding (the "SHARES" and collectively with the Property, the
"COLLATERAL"). The Note and the obligations thereunder are as set forth in
Exhibit A to the Secured Loan Agreement of even date herewith, between Pledgor
and Pledgee.
AGREEMENT
In consideration of the mutual promises, covenants and agreements
hereinafter set forth, and other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Creation and Description of Security Interest; Transferability;
Escrow.
(a) In consideration of the loan to Pledgor under the Secured Loan
Agreement, Pledgor, pursuant to the Commercial Code of the State of California,
hereby (i) grants to the Pledgee a security interest in the Property
(subordinate only to any mortgage indebtedness incurred in connection with the
purchase or refinance thereof) and (ii) pledges the Shares represented by the
certificates therefor, duly endorsed in blank or with executed stock powers, and
herewith delivers such certificates existing as of the date hereof, and agrees
to deliver such certificates as Pledgor may acquire in the future, to the
Secretary of Pledgee (the "PLEDGEHOLDER"), who shall hold said certificates
subject to the terms and conditions of this Agreement.
(b) The pledged stock (together with an executed blank stock
assignment for use in transferring all or a portion of the Shares to Pledgee if,
as and when required pursuant to this Agreement) shall be held by the
Pledgeholder as security for the repayment of the Note, and any extensions or
renewals thereof, to be executed by Pledgor pursuant to the terms of the Secured
Loan Agreement.
(c) Except as required to enable Pledgee to exercise its rights as a
secured party, none of the Shares pledged under this Section 1 may be sold,
transferred, pledged, hypothecated or otherwise disposed of by Pledgor.
<PAGE> 5
(d) To ensure the ability of Pledgee to exercise its rights as a
secured party hereunder, Pledgor shall, upon execution of this Agreement,
deliver and deposit with the Transfer Agent of Pledgee, or such other person
designated by Pledgee, the share certificates representing the Shares currently
held by Pledgor, and to do the same in the future at such time as Pledgor may
acquire additional certificates, together with a stock power, duly endorsed in
blank, in the form attached hereto as Exhibit B-1. The Shares and stock power(s)
shall be held by Pledgee in escrow, until such time as the Note shall have been
paid in full. As a further inducement to Pledgee to loan to Pledgor the funds
represented by the Note, the spouse of Pledgor, if any, shall execute and
deliver to Pledgee the Consent of Spouse attached hereto as Exhibit B-2.
(e) The Property shall be secured pursuant to a deed of trust made by
Pledgor, in the form attached hereto as Exhibit C (the "DEED OF TRUST"),
encumbering the Property, which Pledgor occupies as his principal place of
residence.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
into this Agreement, Pledgor represents and covenants to Pledgee, its successors
and assigns, as follows:
(a) Payment of Indebtedness. Pledgor will pay the principal sum of
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
(b) Encumbrances. All Collateral now or hereafter pledged under this
Agreement are and shall be free of all other encumbrances, defenses and liens,
other than indebtedness incurred in connection with the purchase or refinance of
the Property, and Pledgor will not further encumber the Collateral without the
prior written consent of Pledgee.
3. Voting Rights. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgeholder under the terms of this Agreement in
the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Agreement shall include the substituted shares of capital stock
of Pledgee held by Pledgor as a result thereof.
5. Warrants and Rights. In the event that, during the term of this
pledge, subscription warrants or other rights or options shall be issued in
connection with the pledged Shares, such rights, warrants and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Agreement in the same manner as the Shares pledged.
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<PAGE> 6
6. Default. Pledgor shall be deemed to be in default of the Note and of
this Agreement in the event:
(a) Payment of principal or interest on the Note shall be delinquent
for a period of ten (10) days or more; or
(b) Pledgor fails to perform any of the covenants contained in this
Agreement for a period of ten (10) days after written notice thereof from
Pledgee.
In the case of an event of default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
7. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
8. Term. The pledge of Shares and the Deed of Trust shall continue until
the payment of all indebtedness secured hereby, at which time the remaining
pledged shares shall be promptly delivered to Pledgor and the Deed of Trust
shall be removed.
9. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against Pledgor, or if a receiver is appointed
for the property of Pledgor, or if Pledgor makes an assignment for the benefit
of creditors, the entire amount unpaid on the Note shall become immediately due
and payable, and Pledgee may proceed as provided in the case of default.
10. Pledgeholder Liability. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.
11. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
the unenforceability or invalidity of any provision or provisions of this
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
12. Successors or Assigns. Pledgor and Pledgee agree that all of the
terms of this Agreement shall be binding on their respective successors and
assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall
be deemed to include, for all purposes, the respective designees, successors,
assigns, heirs, executors and administrators.
13. Governing Law. This Agreement shall be interpreted and governed
under the laws of the State of California.
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<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Security
Agreement as of the day and year first above written.
"PLEDGOR" CHARLES WILLIAMS
/s/ CHARLES WILLIAMS
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(Signature)
Address:
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----------------------------------
----------------------------------
"PLEDGEE" COHESION CORPORATION
By: /s/ FRANK DELUSTRO, PH.D.
-------------------------------
Title:
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